Is Sunshine Global CircuitsLtd (SZSE:300739) Using Too Much Debt?

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. Importantly, Sunshine Global Circuits Co.,Ltd. (SZSE:300739) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sunshine Global CircuitsLtd

What Is Sunshine Global CircuitsLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Sunshine Global CircuitsLtd had debt of CN¥840.9m, up from CN¥395.4m in one year. But it also has CN¥1.06b in cash to offset that, meaning it has CN¥220.0m net cash.

How Strong Is Sunshine Global CircuitsLtd's Balance Sheet?

We can see from the most recent balance sheet that Sunshine Global CircuitsLtd had liabilities of CN¥607.6m falling due within a year, and liabilities of CN¥960.2m due beyond that. Offsetting this, it had CN¥1.06b in cash and CN¥326.8m in receivables that were due within 12 months. So its liabilities total CN¥180.1m more than the combination of its cash and short-term receivables.

Given Sunshine Global CircuitsLtd has a market capitalization of CN¥3.70b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sunshine Global CircuitsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Sunshine Global CircuitsLtd's EBIT fell a jaw-dropping 45% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sunshine Global CircuitsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sunshine Global CircuitsLtd 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. During the last three years, Sunshine Global CircuitsLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sunshine Global CircuitsLtd has CN¥220.0m in net cash. Despite its cash we think that Sunshine Global CircuitsLtd seems to struggle to grow its EBIT, so we are wary of the stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Sunshine Global CircuitsLtd (2 are concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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