Here's Why Cherish Sunshine International (HKG:1094) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Cherish Sunshine International Limited (HKG:1094) makes use of debt. But should shareholders be worried about its use of debt?

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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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Cherish Sunshine International's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Cherish Sunshine International had HK$171.2m of debt, an increase on HK$123.5m, over one year. However, it does have HK$30.5m in cash offsetting this, leading to net debt of about HK$140.7m.

A Look At Cherish Sunshine International's Liabilities

The latest balance sheet data shows that Cherish Sunshine International had liabilities of HK$331.6m due within a year, and liabilities of HK$13.4m falling due after that. Offsetting this, it had HK$30.5m in cash and HK$229.0m in receivables that were due within 12 months. So its liabilities total HK$85.4m more than the combination of its cash and short-term receivables.

Cherish Sunshine International has a market capitalization of HK$314.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Cherish Sunshine International 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.

Check out our latest analysis for Cherish Sunshine International

In the last year Cherish Sunshine International had a loss before interest and tax, and actually shrunk its revenue by 87%, to HK$98m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Cherish Sunshine International's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$70m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of HK$124m. So in short it's a really risky stock. 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. Case in point: We've spotted 4 warning signs for Cherish Sunshine International you should be aware of, and 2 of them are concerning.

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.