Health Check: How Prudently Does Sunright (SGX:S71) Use Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Sunright Limited (SGX:S71) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Sunright

What Is Sunright's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sunright had S$6.95m of debt in January 2022, down from S$12.3m, one year before. But it also has S$99.5m in cash to offset that, meaning it has S$92.5m net cash.

How Healthy Is Sunright's Balance Sheet?

According to the last reported balance sheet, Sunright had liabilities of S$20.0m due within 12 months, and liabilities of S$6.63m due beyond 12 months. Offsetting these obligations, it had cash of S$99.5m as well as receivables valued at S$21.2m due within 12 months. So it can boast S$94.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Sunright's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Sunright boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sunright 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.

In the last year Sunright had a loss before interest and tax, and actually shrunk its revenue by 4.6%, to S$106m. We would much prefer see growth.

So How Risky Is Sunright?

While Sunright lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow S$1.1m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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 2 warning signs for Sunright (of which 1 doesn't sit too well with us!) 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.