These 4 Measures Indicate That Sinostar PEC Holdings (SGX:C9Q) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Sinostar PEC Holdings Limited (SGX:C9Q) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sinostar PEC Holdings

What Is Sinostar PEC Holdings's Debt?

The image below, which you can click on for greater detail, shows that Sinostar PEC Holdings had debt of CN¥480.0m at the end of June 2024, a reduction from CN¥740.0m over a year. However, it does have CN¥663.1m in cash offsetting this, leading to net cash of CN¥183.1m.

A Look At Sinostar PEC Holdings' Liabilities

The latest balance sheet data shows that Sinostar PEC Holdings had liabilities of CN¥437.0m due within a year, and liabilities of CN¥252.9m falling due after that. On the other hand, it had cash of CN¥663.1m and CN¥64.7m worth of receivables due within a year. So it can boast CN¥37.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Sinostar PEC Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sinostar PEC Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Sinostar PEC Holdings grew its EBIT by 378% 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 Sinostar PEC Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sinostar PEC 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, Sinostar PEC Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sinostar PEC Holdings has net cash of CN¥183.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥687m, being 122% of its EBIT. So is Sinostar PEC Holdings's debt a risk? It doesn't seem so to us. 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 - Sinostar PEC Holdings has 3 warning signs we think you should be aware of.

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.