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Is SITC International Holdings (HKG:1308) Using Too Much Debt?

Simply Wall St

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that SITC International Holdings Company Limited (HKG:1308) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 as of June 2019 SITC International Holdings had US$424.1m of debt, an increase on US$328.6m, over one year. However, its balance sheet shows it holds US$503.1m in cash, so it actually has US$79.0m net cash.

SEHK:1308 Historical Debt, September 15th 2019

How Strong Is SITC International Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SITC International Holdings had liabilities of US$365.2m due within 12 months and liabilities of US$377.0m due beyond that. Offsetting this, it had US$503.1m in cash and US$70.6m in receivables that were due within 12 months. So it has liabilities totalling US$168.4m more than its cash and near-term receivables, combined.

Of course, SITC International Holdings has a market capitalization of US$2.82b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Also good is that SITC International Holdings grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if SITC International Holdings can strengthen its balance sheet over time. 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. 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 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

We could understand if investors are concerned about SITC International Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$79m. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in US$150m. So is SITC International Holdings's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in SITC International Holdings would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.