These 4 Measures Indicate That Sungrow Power Supply (SZSE:300274) Is Using Debt Reasonably Well

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.' 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. As with many other companies Sungrow Power Supply Co., Ltd. (SZSE:300274) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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?

The image below, which you can click on for greater detail, shows that at September 2024 Sungrow Power Supply had debt of CN¥18.3b, up from CN¥11.1b in one year. However, its balance sheet shows it holds CN¥22.2b in cash, so it actually has CN¥3.87b net cash.

A Look At Sungrow Power Supply's Liabilities

Zooming in on the latest balance sheet data, we can see that Sungrow Power Supply had liabilities of CN¥56.0b due within 12 months and liabilities of CN¥13.5b due beyond that. On the other hand, it had cash of CN¥22.2b and CN¥30.6b worth of receivables due within a year. So its liabilities total CN¥16.6b more than the combination of its cash and short-term receivables.

Of course, Sungrow Power Supply has a titanic market capitalization of CN¥176.4b, 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. Despite its noteworthy liabilities, Sungrow Power Supply boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Sungrow Power Supply grew its EBIT by 19% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sungrow Power Supply's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

We could understand if investors are concerned about Sungrow Power Supply's liabilities, but we can be reassured by the fact it has has net cash of CN¥3.87b. And we liked the look of last year's 19% year-on-year EBIT growth. So we don't have any problem with Sungrow Power Supply's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Sungrow Power Supply (of which 1 makes us a bit uncomfortable!) you should know about.

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.

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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.