These 4 Measures Indicate That Sunshine Global CircuitsLtd (SZSE:300739) Is Using Debt Extensively

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Sunshine Global Circuits Co.,Ltd. (SZSE:300739) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sunshine Global CircuitsLtd

How Much Debt Does Sunshine Global CircuitsLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Sunshine Global CircuitsLtd had debt of CN¥827.7m, up from CN¥420.0m in one year. However, its balance sheet shows it holds CN¥1.18b in cash, so it actually has CN¥348.3m net cash.

How Healthy Is Sunshine Global CircuitsLtd's Balance Sheet?

The latest balance sheet data shows that Sunshine Global CircuitsLtd had liabilities of CN¥593.6m due within a year, and liabilities of CN¥959.8m falling due after that. Offsetting this, it had CN¥1.18b in cash and CN¥305.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥71.9m more than its cash and near-term receivables, combined.

Having regard to Sunshine Global CircuitsLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.03b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Sunshine Global CircuitsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Sunshine Global CircuitsLtd's load is not too heavy, because its EBIT was down 46% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Sunshine Global CircuitsLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Sunshine Global CircuitsLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥348.3m. So while Sunshine Global CircuitsLtd does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Sunshine Global CircuitsLtd (1 is a bit concerning!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.