Is Sunwave CommunicationsLtd (SZSE:002115) Using Debt In A Risky Way?

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. Importantly, Sunwave Communications Co.Ltd (SZSE:002115) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Sunwave CommunicationsLtd

How Much Debt Does Sunwave CommunicationsLtd Carry?

As you can see below, Sunwave CommunicationsLtd had CN¥522.1m of debt at September 2024, down from CN¥581.6m a year prior. However, its balance sheet shows it holds CN¥1.01b in cash, so it actually has CN¥487.0m net cash.

How Strong Is Sunwave CommunicationsLtd's Balance Sheet?

We can see from the most recent balance sheet that Sunwave CommunicationsLtd had liabilities of CN¥1.87b falling due within a year, and liabilities of CN¥137.5m due beyond that. Offsetting this, it had CN¥1.01b in cash and CN¥912.3m in receivables that were due within 12 months. So it has liabilities totalling CN¥85.9m more than its cash and near-term receivables, combined.

This state of affairs indicates that Sunwave CommunicationsLtd'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¥7.90b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Sunwave CommunicationsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sunwave CommunicationsLtd 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.

Over 12 months, Sunwave CommunicationsLtd made a loss at the EBIT level, and saw its revenue drop to CN¥11b, which is a fall of 14%. We would much prefer see growth.

So How Risky Is Sunwave CommunicationsLtd?

While Sunwave CommunicationsLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥297m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For instance, we've identified 2 warning signs for Sunwave CommunicationsLtd (1 is a bit concerning) you should be aware of.

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.