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

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. 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?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SITC International Holdings

How Much Debt Does SITC International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that SITC International Holdings had US$332.2m of debt in June 2022, down from US$371.7m, one year before. But on the other hand it also has US$1.24b in cash, leading to a US$905.1m net cash position.

How Strong Is SITC International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SITC International Holdings had liabilities of US$519.3m due within 12 months and liabilities of US$465.9m due beyond that. Offsetting this, it had US$1.24b in cash and US$236.0m in receivables that were due within 12 months. So it actually has US$488.0m 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!

Better yet, SITC International Holdings grew its EBIT by 149% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the most recent three years, SITC International Holdings recorded free cash flow worth 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case SITC International Holdings has US$905.1m in net cash and a decent-looking balance sheet. And we liked the look of last year's 149% year-on-year EBIT growth. 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. However, not all investment risk resides within the balance sheet - far from it. For example SITC International Holdings has 2 warning signs (and 1 which makes us a bit uncomfortable) 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.