We Think SITC International Holdings (HKG:1308) Can Stay On Top Of Its Debt

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. Importantly, SITC International Holdings Company Limited (HKG:1308) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for SITC International Holdings

What Is SITC International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that SITC International Holdings had debt of US$169.0m at the end of December 2023, a reduction from US$271.4m over a year. But on the other hand it also has US$454.5m in cash, leading to a US$285.5m 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$503.0m due within 12 months and liabilities of US$218.4m due beyond that. Offsetting these obligations, it had cash of US$454.5m as well as receivables valued at US$113.3m due within 12 months. So it has liabilities totalling US$153.6m more than its cash and near-term receivables, combined.

Of course, SITC International Holdings has a market capitalization of US$6.61b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 73% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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 88% 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$285.5m in net cash. And it impressed us with free cash flow of US$363m, being 88% of its EBIT. So we are not troubled with SITC International Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that SITC International Holdings is showing 2 warning signs in our investment analysis , 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.