We Think Sun.King Technology Group (HKG:580) Can Stay On Top Of Its 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. We note that Sun.King Technology Group Limited (HKG:580) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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¥383.9m of debt at December 2020, down from CN¥471.8m a year prior. However, its balance sheet shows it holds CN¥678.4m in cash, so it actually has CN¥294.5m net cash.

A Look At Sun.King Technology Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Sun.King Technology Group had liabilities of CN¥644.7m due within 12 months and liabilities of CN¥100.6m due beyond that. On the other hand, it had cash of CN¥678.4m and CN¥886.2m worth of receivables due within a year. So it actually has CN¥819.4m more liquid assets than total liabilities.

This surplus suggests that Sun.King Technology Group is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Sun.King Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Sun.King Technology Group has increased its EBIT by 3.8% over twelve months, which should ease any concerns about debt repayment. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 7.3% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish 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¥294.5m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 3.8% in the last twelve months. So we are not troubled with Sun.King Technology Group's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. 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 that 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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