We Think Sunny Optical Technology (Group) (HKG:2382) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Sunny Optical Technology (Group) Company Limited (HKG:2382) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sunny Optical Technology (Group)

What Is Sunny Optical Technology (Group)'s Net Debt?

As you can see below, Sunny Optical Technology (Group) had CN¥5.89b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥20.0b in cash, leading to a CN¥14.1b net cash position.

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

We can see from the most recent balance sheet that Sunny Optical Technology (Group) had liabilities of CN¥19.1b falling due within a year, and liabilities of CN¥5.83b due beyond that. Offsetting these obligations, it had cash of CN¥20.0b as well as receivables valued at CN¥8.20b due within 12 months. So it can boast CN¥3.32b 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. Succinctly put, Sunny Optical Technology (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Sunny Optical Technology (Group) has increased its EBIT by 2.3% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sunny Optical Technology (Group) can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sunny Optical 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, Sunny Optical Technology (Group) actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sunny Optical Technology (Group) has CN¥14.1b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 141% of that EBIT to free cash flow, bringing in CN¥1.2b. So we don't think Sunny Optical Technology (Group)'s use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Sunny Optical Technology (Group), you may well want to click here to check an interactive graph of its earnings per share history.

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.