Sun.King Technology Group (HKG:580) Has A Pretty 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.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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?

You can click the graphic below for the historical numbers, but it shows that Sun.King Technology Group had CN¥312.1m of debt in June 2021, down from CN¥474.4m, one year before. But it also has CN¥747.7m in cash to offset that, meaning it has CN¥435.6m net cash.

A Look At Sun.King Technology Group's Liabilities

We can see from the most recent balance sheet that Sun.King Technology Group had liabilities of CN¥651.8m falling due within a year, and liabilities of CN¥127.6m due beyond that. On the other hand, it had cash of CN¥747.7m and CN¥805.9m worth of receivables due within a year. So it can boast CN¥774.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Sun.King Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 57% 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sun.King Technology Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Sun.King Technology Group reported free cash flow worth 17% 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 it is always sensible to investigate a company's debt, in this case Sun.King Technology Group has CN¥435.6m in net cash and a decent-looking balance sheet. So we don't have any problem with Sun.King Technology Group's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Sun.King Technology Group you should know about.

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.