Is Sunshine 100 China Holdings (HKG:2608) Using Too Much Debt?

Warren Buffett famously said, '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 Sunshine 100 China Holdings Ltd (HKG:2608) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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.

Check out our latest analysis for Sunshine 100 China Holdings

What Is Sunshine 100 China Holdings's Debt?

As you can see below, Sunshine 100 China Holdings had CN¥25.6b of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.50b in cash offsetting this, leading to net debt of about CN¥24.1b.

How Healthy Is Sunshine 100 China Holdings' Balance Sheet?

According to the last reported balance sheet, Sunshine 100 China Holdings had liabilities of CN¥30.2b due within 12 months, and liabilities of CN¥16.5b due beyond 12 months. Offsetting this, it had CN¥1.50b in cash and CN¥6.46b in receivables that were due within 12 months. So it has liabilities totalling CN¥38.8b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥1.14b 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. There's no doubt that we learn most about debt from the balance sheet. But it is Sunshine 100 China Holdings'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.

In the last year Sunshine 100 China Holdings had a loss before interest and tax, and actually shrunk its revenue by 33%, to CN¥5.6b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Sunshine 100 China Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥327m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But we note that trailing twelve month EBIT is worse than the free cash flow of CN¥1.3b and the profit of CN¥85m. So its situation may not be as precarious as the EBIT would imply. When analysing debt levels, the balance sheet is the obvious place to start. 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 4 warning signs for Sunshine 100 China Holdings (of which 1 is potentially serious!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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