Is Sun.King Technology Group (HKG:580) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Sun.King Technology Group Limited (HKG:580) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Sun.King Technology Group

How Much Debt Does Sun.King Technology Group Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Sun.King Technology Group had debt of CN¥377.7m, up from CN¥235.3m in one year. But it also has CN¥463.1m in cash to offset that, meaning it has CN¥85.4m net cash.

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

According to the last reported balance sheet, Sun.King Technology Group had liabilities of CN¥772.2m due within 12 months, and liabilities of CN¥197.7m due beyond 12 months. Offsetting this, it had CN¥463.1m in cash and CN¥1.09b in receivables that were due within 12 months. So it can boast CN¥583.0m 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). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Sun.King Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Sun.King Technology Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥39m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sun.King Technology Group's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 year, Sun.King Technology Group 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

While it is always sensible to investigate a company's debt, in this case Sun.King Technology Group has CN¥85.4m in net cash and a decent-looking balance sheet. So we are not troubled with Sun.King Technology Group's debt use. 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. For example Sun.King Technology Group has 2 warning signs (and 1 which is significant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.