Is SITC International Holdings (HKG:1308) Using Too Much Debt?

Warren Buffett famously said, '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. Importantly, SITC International Holdings Company Limited (HKG:1308) does carry debt. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

What Is SITC International Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that SITC International Holdings had US$166.9m in debt in December 2024; about the same as the year before. However, its balance sheet shows it holds US$769.4m in cash, so it actually has US$602.6m net cash.

How Strong Is SITC International Holdings' Balance Sheet?

The latest balance sheet data shows that SITC International Holdings had liabilities of US$544.8m due within a year, and liabilities of US$231.8m falling due after that. Offsetting this, it had US$769.4m in cash and US$174.7m in receivables that were due within 12 months. So it actually has US$167.5m more liquid assets than total liabilities.

This surplus suggests that SITC International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, SITC International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for SITC International Holdings

Even more impressive was the fact that SITC International Holdings grew its EBIT by 106% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SITC International Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. SITC International Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, SITC International Holdings generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case SITC International Holdings has US$602.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in US$897m. So is SITC International Holdings's debt a risk? It doesn't seem so to us. 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 SITC International Holdings has 3 warning signs (and 1 which is potentially serious) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.