SITC International Holdings (HKG:1308) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that SITC International Holdings Company Limited (HKG:1308) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 Debt?

The image below, which you can click on for greater detail, shows that SITC International Holdings had debt of US$173.3m at the end of June 2024, a reduction from US$208.5m over a year. But on the other hand it also has US$508.3m in cash, leading to a US$334.9m 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$516.3m falling due within a year, and liabilities of US$217.4m due beyond that. Offsetting these obligations, it had cash of US$508.3m as well as receivables valued at US$153.4m due within 12 months. So it has liabilities totalling US$72.0m 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 it's very unlikely that the US$6.79b company is short on cash, but still worth keeping an eye on the 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.

It is just as well that SITC International Holdings's load is not too heavy, because its EBIT was down 42% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 85% of its EBIT, more than we'd 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$334.9m. And it impressed us with free cash flow of US$449m, being 85% of its EBIT. So we don't have any problem with SITC International Holdings's use of debt. 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. Be aware that SITC International Holdings is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.