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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Sun.King Technology Group Limited (HKG:580) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sun.King Technology Group

How Much Debt Does Sun.King Technology Group Carry?

As you can see below, Sun.King Technology Group had CN¥200.6m of debt at June 2022, down from CN¥312.1m a year prior. But it also has CN¥652.4m in cash to offset that, meaning it has CN¥451.9m net cash.

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¥431.6m falling due within a year, and liabilities of CN¥176.6m due beyond that. Offsetting these obligations, it had cash of CN¥652.4m as well as receivables valued at CN¥765.5m due within 12 months. So it can boast CN¥809.7m more liquid assets than total liabilities.

This surplus strongly suggests that Sun.King Technology Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Sun.King Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Sun.King Technology Group's saving grace is its low debt levels, because its EBIT has tanked 91% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sun.King Technology Group 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 Sun.King Technology Group 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. In the last three years, Sun.King Technology Group created free cash flow amounting to 8.6% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sun.King Technology Group has CN¥451.9m in net cash and a decent-looking balance sheet. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Sun.King Technology Group (1 shouldn't be ignored) 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. 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.