Is SITI Networks (NSE:SITINET) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that SITI Networks Limited (NSE:SITINET) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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 SITI Networks

How Much Debt Does SITI Networks Carry?

The chart below, which you can click on for greater detail, shows that SITI Networks had ₹12.1b in debt in September 2020; about the same as the year before. However, it also had ₹2.12b in cash, and so its net debt is ₹10.0b.

How Healthy Is SITI Networks' Balance Sheet?

We can see from the most recent balance sheet that SITI Networks had liabilities of ₹18.0b falling due within a year, and liabilities of ₹3.32b due beyond that. Offsetting these obligations, it had cash of ₹2.12b as well as receivables valued at ₹3.03b due within 12 months. So its liabilities total ₹16.2b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹750.0m 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. There's no doubt that we learn most about debt from the balance sheet. But it is SITI Networks's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, SITI Networks reported revenue of ₹16b, which is a gain of 2.2%, although it did not report any earnings before interest and tax. 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 ₹433m 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. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹2.1b in the last year. So we're not very excited about owning this stock. Its too risky for us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that SITI Networks is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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