Is SITC International Holdings (HKG:1308) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that SITC International Holdings Company Limited (HKG:1308) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SITC International Holdings

What Is SITC International Holdings's Debt?

As you can see below, SITC International Holdings had US$371.7m of debt at June 2021, down from US$422.2m a year prior. However, its balance sheet shows it holds US$719.4m in cash, so it actually has US$347.7m net cash.

How Healthy Is SITC International Holdings' Balance Sheet?

The latest balance sheet data shows that SITC International Holdings had liabilities of US$434.9m due within a year, and liabilities of US$451.3m falling due after that. Offsetting this, it had US$719.4m in cash and US$126.2m in receivables that were due within 12 months. So its liabilities total US$40.6m more than the combination of its cash and short-term receivables.

Having regard to SITC International Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$11.7b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, SITC International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, SITC International Holdings grew its EBIT by 216% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if SITC International Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While SITC International Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, SITC International Holdings generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that SITC International Holdings has US$347.7m in net cash. And it impressed us with free cash flow of US$643m, being 91% of its EBIT. So we don't think SITC International Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for SITC International Holdings you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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