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

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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When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

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

The image below, which you can click on for greater detail, shows that at December 2024 Sunny Optical Technology (Group) had debt of CN¥5.90b, up from CN¥5.56b in one year. But it also has CN¥21.4b in cash to offset that, meaning it has CN¥15.5b net cash.

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¥22.4b due within 12 months and liabilities of CN¥6.12b due beyond that. Offsetting this, it had CN¥21.4b in cash and CN¥9.46b in receivables that were due within 12 months. So it can boast CN¥2.36b more liquid assets than total liabilities.

This surplus suggests that Sunny Optical Technology (Group) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sunny Optical Technology (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Sunny Optical Technology (Group)

Even more impressive was the fact that Sunny Optical Technology (Group) grew its EBIT by 289% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, Sunny Optical Technology (Group) actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sunny Optical Technology (Group) has net cash of CN¥15.5b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.2b, being 106% of its EBIT. So is Sunny Optical Technology (Group)'s debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Sunny Optical Technology (Group)'s earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.