Does Sun.King Technology Group (HKG:580) Have A Healthy Balance Sheet?

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 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. Importantly, Sun.King Technology Group Limited (HKG:580) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sun.King Technology Group

What Is Sun.King Technology Group's Debt?

As you can see below, at the end of June 2020, Sun.King Technology Group had CN¥474.4m of debt, up from CN¥327.2m a year ago. Click the image for more detail. However, it does have CN¥534.8m in cash offsetting this, leading to net cash of CN¥60.4m.

How Strong Is Sun.King Technology Group's Balance Sheet?

We can see from the most recent balance sheet that Sun.King Technology Group had liabilities of CN¥806.2m falling due within a year, and liabilities of CN¥20.3m due beyond that. Offsetting this, it had CN¥534.8m in cash and CN¥1.04b in receivables that were due within 12 months. So it can boast CN¥752.8m more liquid assets than total liabilities.

This luscious liquidity implies that Sun.King Technology Group's balance sheet is sturdy like a giant sequoia tree. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Sun.King Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Sun.King Technology Group has increased its EBIT by 8.3% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sun.King Technology Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sun.King Technology Group 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 three years, Sun.King Technology Group reported free cash flow worth 2.6% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sun.King Technology Group has net cash of CN¥60.4m, as well as more liquid assets than liabilities. And it also grew its EBIT by 8.3% over the last year. So we are not troubled with Sun.King Technology Group's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Sun.King Technology Group (1 is significant) you should be aware of.

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.

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This article by Simply Wall St is general in nature. 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.
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