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.' 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 Sunshine Global Circuits Co.,Ltd. (SZSE:300739) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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.

View our latest analysis for Sunshine Global CircuitsLtd

What Is Sunshine Global CircuitsLtd's Net Debt?

As you can see below, Sunshine Global CircuitsLtd had CN¥674.7m of debt at March 2022, down from CN¥783.9m a year prior. However, its balance sheet shows it holds CN¥1.14b in cash, so it actually has CN¥460.6m net cash.

How Healthy Is Sunshine Global CircuitsLtd's Balance Sheet?

According to the last reported balance sheet, Sunshine Global CircuitsLtd had liabilities of CN¥1.10b due within 12 months, and liabilities of CN¥493.0m due beyond 12 months. Offsetting this, it had CN¥1.14b in cash and CN¥433.8m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Sunshine Global CircuitsLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥5.05b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Sunshine Global CircuitsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Sunshine Global CircuitsLtd grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sunshine Global CircuitsLtd will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sunshine Global CircuitsLtd 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. During the last three years, Sunshine Global CircuitsLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Sunshine Global CircuitsLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥460.6m. And it impressed us with its EBIT growth of 34% over the last year. So we are not troubled with Sunshine Global CircuitsLtd's debt use. 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. To that end, you should learn about the 3 warning signs we've spotted with Sunshine Global CircuitsLtd (including 1 which is a bit concerning) .

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.