Is SITI Networks (NSE:SITINET) Using Debt 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies SITI Networks Limited (NSE:SITINET) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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.

Check out our latest analysis for SITI Networks

What Is SITI Networks's Debt?

You can click the graphic below for the historical numbers, but it shows that SITI Networks had ₹12.1b of debt in September 2020, down from ₹15.8b, one year before. However, it does have ₹2.12b in cash offsetting this, leading to net debt of about ₹10.0b.

A Look At SITI Networks's Liabilities

The latest balance sheet data shows that SITI Networks had liabilities of ₹18.0b due within a year, and liabilities of ₹3.32b falling due after that. Offsetting these obligations, it had cash of ₹2.12b as well as receivables valued at ₹3.03b due within 12 months. So it has liabilities totalling ₹16.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹767.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, SITI Networks would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SITI Networks will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year SITI Networks wasn't profitable at an EBIT level, but managed to grow its revenue by 4.7%, to ₹16b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, SITI Networks had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₹314m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹1.9b in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. Take risks, for example - SITI Networks has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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