We Think SITC International Holdings (HKG:1308) Can Manage Its Debt With Ease

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 the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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$371.7m of debt at June 2021, down from US$422.2m a year prior. However, its balance sheet shows it holds US$719.4m in cash, so it actually has US$347.7m net cash.

A Look At SITC International Holdings' Liabilities

The latest balance sheet data shows that SITC International Holdings had liabilities of US$434.9m due within a year, and liabilities of US$451.3m falling due after that. Offsetting these obligations, it had cash of US$719.4m as well as receivables valued at US$126.2m due within 12 months. So it has liabilities totalling US$40.6m 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$10.0b 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.

Even more impressive was the fact that SITC International Holdings grew its EBIT by 216% 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, SITC International Holdings recorded free cash flow worth a fulsome 91% 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 look at a company's total liabilities, it is very reassuring that SITC International Holdings has US$347.7m in net cash. And it impressed us with free cash flow of US$643m, being 91% of its EBIT. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with SITC International Holdings , and understanding them should be part of your investment process.

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.