SITC International Holdings (HKG:1308) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies SITC International Holdings Company Limited (HKG:1308) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View 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$327.5m of debt at December 2021, down from US$434.3m a year prior. But it also has US$965.8m in cash to offset that, meaning it has US$638.3m net cash.

A Look At SITC International Holdings' Liabilities

The latest balance sheet data shows that SITC International Holdings had liabilities of US$785.3m due within a year, and liabilities of US$415.5m falling due after that. Offsetting these obligations, it had cash of US$965.8m as well as receivables valued at US$157.0m due within 12 months. So it has liabilities totalling US$77.9m more than its cash and near-term receivables, combined.

Having regard to SITC International Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$9.07b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, SITC International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, SITC International Holdings grew its EBIT by 235% 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 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.

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. Over the last three years, SITC International Holdings recorded free cash flow worth a fulsome 97% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

We could understand if investors are concerned about SITC International Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$638.3m. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in US$1.1b. So is SITC International Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - SITC International Holdings has 2 warning signs we think you should be aware of.

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.