Does Sungrow Power Supply (SZSE:300274) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Sungrow Power Supply Co., Ltd. (SZSE:300274) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sungrow Power Supply

How Much Debt Does Sungrow Power Supply Carry?

As you can see below, at the end of March 2024, Sungrow Power Supply had CN¥10.7b of debt, up from CN¥8.85b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥20.6b in cash, so it actually has CN¥9.93b net cash.

How Strong Is Sungrow Power Supply's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sungrow Power Supply had liabilities of CN¥44.4b due within 12 months and liabilities of CN¥8.88b due beyond that. On the other hand, it had cash of CN¥20.6b and CN¥25.2b worth of receivables due within a year. So its liabilities total CN¥7.50b more than the combination of its cash and short-term receivables.

Given Sungrow Power Supply has a humongous market capitalization of CN¥144.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Sungrow Power Supply boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Sungrow Power Supply grew its EBIT by 146% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sungrow Power Supply can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Sungrow Power Supply 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. In the last three years, Sungrow Power Supply created free cash flow amounting to 12% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sungrow Power Supply has CN¥9.93b in net cash. And it impressed us with its EBIT growth of 146% over the last year. So is Sungrow Power Supply'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 Sungrow Power Supply has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com