David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Starlite Holdings Limited (HKG:403) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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.
See our latest analysis for Starlite Holdings
How Much Debt Does Starlite Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that Starlite Holdings had HK$62.0m of debt in March 2024, down from HK$84.1m, one year before. However, it does have HK$217.6m in cash offsetting this, leading to net cash of HK$155.7m.
How Strong Is Starlite Holdings' Balance Sheet?
We can see from the most recent balance sheet that Starlite Holdings had liabilities of HK$256.8m falling due within a year, and liabilities of HK$9.57m due beyond that. Offsetting this, it had HK$217.6m in cash and HK$172.4m in receivables that were due within 12 months. So it can boast HK$123.7m more liquid assets than total liabilities.
This surplus strongly suggests that Starlite Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Starlite Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
Notably, Starlite Holdings's EBIT launched higher than Elon Musk, gaining a whopping 152% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Starlite 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 company can only pay off debt with cold hard cash, not accounting profits. While Starlite Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Starlite 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 it is always sensible to investigate a company's debt, in this case Starlite Holdings has HK$155.7m in net cash and a strong balance sheet. The cherry on top was that in converted 190% of that EBIT to free cash flow, bringing in HK$32m. At the end of the day we're not concerned about Starlite Holdings's debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Starlite Holdings that you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com