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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, SITC International Holdings Company Limited (HKG:1308) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for SITC International Holdings

What Is SITC International Holdings's Net Debt?

As you can see below, SITC International Holdings had US$332.2m of debt at June 2022, down from US$371.7m a year prior. However, its balance sheet shows it holds US$1.24b in cash, so it actually has US$905.1m net cash.

How Strong Is SITC International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SITC International Holdings had liabilities of US$519.3m due within 12 months and liabilities of US$465.9m due beyond that. On the other hand, it had cash of US$1.24b and US$236.0m worth of receivables due within a year. So it actually has US$488.0m more liquid assets than total liabilities.

This short term liquidity is a sign that SITC International Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SITC International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that SITC International Holdings grew its EBIT by 149% over twelve months. 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 it is future earnings, more than anything, that will determine SITC International Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SITC International Holdings has net cash of US$905.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in US$1.6b. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for SITC International Holdings (2 can't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.