These 4 Measures Indicate That Sunyard TechnologyLtd (SHSE:600571) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Sunyard Technology Co.,Ltd (SHSE:600571) makes use of debt. But is this debt a concern to shareholders?

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. 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, 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.

Check out our latest analysis for Sunyard TechnologyLtd

How Much Debt Does Sunyard TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Sunyard TechnologyLtd had CN¥78.0m of debt, an increase on CN¥500.0k, over one year. But it also has CN¥470.3m in cash to offset that, meaning it has CN¥392.3m net cash.

A Look At Sunyard TechnologyLtd's Liabilities

According to the last reported balance sheet, Sunyard TechnologyLtd had liabilities of CN¥327.3m due within 12 months, and liabilities of CN¥8.62m due beyond 12 months. Offsetting these obligations, it had cash of CN¥470.3m as well as receivables valued at CN¥476.5m due within 12 months. So it actually has CN¥610.8m more liquid assets than total liabilities.

This surplus suggests that Sunyard TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sunyard TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Sunyard TechnologyLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥18m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sunyard TechnologyLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sunyard TechnologyLtd 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 year, Sunyard TechnologyLtd 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 we empathize with investors who find debt concerning, you should keep in mind that Sunyard TechnologyLtd has net cash of CN¥392.3m, as well as more liquid assets than liabilities. So we are not troubled with Sunyard TechnologyLtd's debt use. 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 Sunyard TechnologyLtd (of which 2 make us uncomfortable!) 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.