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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies SITC International Holdings Company Limited (HKG:1308) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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?

You can click the graphic below for the historical numbers, but it shows that SITC International Holdings had US$271.4m of debt in December 2022, down from US$327.5m, one year before. But on the other hand it also has US$1.02b in cash, leading to a US$750.9m net cash position.

How Healthy Is SITC International Holdings' Balance Sheet?

We can see from the most recent balance sheet that SITC International Holdings had liabilities of US$488.4m falling due within a year, and liabilities of US$429.5m due beyond that. On the other hand, it had cash of US$1.02b and US$139.1m worth of receivables due within a year. So it actually has US$243.6m 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. Simply put, the fact that SITC International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that SITC International Holdings has boosted its EBIT by 55%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 90% 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

While it is always sensible to investigate a company's debt, in this case SITC International Holdings has US$750.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$1.5b, being 90% of its EBIT. So we don't think SITC International Holdings's use of debt is risky. 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 3 warning signs (and 2 which are a bit concerning) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.