Is Sunny Optical Technology (Group) (HKG:2382) A Risky Investment?

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 can see that Sunny Optical Technology (Group) Company Limited (HKG:2382) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Sunny Optical Technology (Group) Carry?

As you can see below, at the end of June 2025, Sunny Optical Technology (Group) had CN¥6.42b of debt, up from CN¥5.89b a year ago. Click the image for more detail. But on the other hand it also has CN¥24.0b in cash, leading to a CN¥17.6b net cash position.

A Look At Sunny Optical Technology (Group)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Sunny Optical Technology (Group) had liabilities of CN¥24.8b due within 12 months and liabilities of CN¥4.40b due beyond that. Offsetting these obligations, it had cash of CN¥24.0b as well as receivables valued at CN¥9.97b due within 12 months. So it actually has CN¥4.83b more liquid assets than total liabilities.

This short term liquidity is a sign that Sunny Optical Technology (Group) could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Sunny Optical Technology (Group) has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Sunny Optical Technology (Group)

Even more impressive was the fact that Sunny Optical Technology (Group) grew its EBIT by 110% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sunny Optical Technology (Group)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sunny Optical 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, Sunny Optical Technology (Group) actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sunny Optical Technology (Group) has CN¥17.6b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.0b, being 118% of its EBIT. So is Sunny Optical Technology (Group)'s debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sunny Optical Technology (Group) is showing 1 warning sign in our investment analysis , you should know about...

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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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.