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

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.' 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 Sungrow Power Supply Co., Ltd. (SZSE:300274) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sungrow Power Supply

What Is Sungrow Power Supply's Debt?

As you can see below, at the end of September 2024, Sungrow Power Supply had CN¥18.3b of debt, up from CN¥11.1b a year ago. Click the image for more detail. But it also has CN¥22.2b in cash to offset that, meaning it has CN¥3.87b 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¥56.0b due within 12 months and liabilities of CN¥13.5b due beyond that. Offsetting this, it had CN¥22.2b in cash and CN¥30.6b in receivables that were due within 12 months. So it has liabilities totalling CN¥16.6b more than its cash and near-term receivables, combined.

Of course, Sungrow Power Supply has a titanic market capitalization of CN¥139.4b, so these liabilities are probably manageable. 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!

Also good is that Sungrow Power Supply grew its EBIT at 19% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, 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 18% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

Although Sungrow Power Supply's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥3.87b. And it impressed us with its EBIT growth of 19% over the last year. So we don't have any problem with Sungrow Power Supply's use of debt. 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. Case in point: We've spotted 2 warning signs for Sungrow Power Supply you should be aware of, and 1 of them can't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.