Is Sunshine 100 China Holdings (HKG:2608) Weighed On By Its Debt Load?

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.' 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. Importantly, Sunshine 100 China Holdings Ltd (HKG:2608) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sunshine 100 China Holdings

What Is Sunshine 100 China Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Sunshine 100 China Holdings had CN¥27.4b in debt in June 2023; about the same as the year before. However, it also had CN¥827.7m in cash, and so its net debt is CN¥26.6b.

How Healthy Is Sunshine 100 China Holdings' Balance Sheet?

According to the last reported balance sheet, Sunshine 100 China Holdings had liabilities of CN¥44.7b due within 12 months, and liabilities of CN¥4.57b due beyond 12 months. Offsetting these obligations, it had cash of CN¥827.7m as well as receivables valued at CN¥7.45b due within 12 months. So it has liabilities totalling CN¥41.0b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥159.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Sunshine 100 China Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sunshine 100 China Holdings 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.

Over 12 months, Sunshine 100 China Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥2.3b, which is a fall of 28%. That makes us nervous, to say the least.

Caveat Emptor

While Sunshine 100 China Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥593m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥3.4b in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. Be aware that Sunshine 100 China Holdings is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...

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.