The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Sunshine Global Circuits Co.,Ltd. (SZSE:300739) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Sunshine Global CircuitsLtd
What Is Sunshine Global CircuitsLtd's Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Sunshine Global CircuitsLtd had debt of CN¥827.7m, up from CN¥420.0m in one year. But on the other hand it also has CN¥1.18b in cash, leading to a CN¥348.3m net cash position.
How Healthy Is Sunshine Global CircuitsLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Sunshine Global CircuitsLtd had liabilities of CN¥593.6m due within 12 months and liabilities of CN¥959.8m due beyond that. Offsetting this, it had CN¥1.18b in cash and CN¥305.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥71.9m.
This state of affairs indicates that Sunshine Global CircuitsLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥3.75b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Sunshine Global CircuitsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.
It is just as well that Sunshine Global CircuitsLtd's load is not too heavy, because its EBIT was down 46% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sunshine Global CircuitsLtd'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, Sunshine Global CircuitsLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Sunshine Global CircuitsLtd has CN¥348.3m in net cash. So although we see some areas for improvement, we're not too worried about Sunshine Global CircuitsLtd's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Sunshine Global CircuitsLtd that you should be aware of.
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.
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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.