Is Sunright (SGX:S71) Using Too Much 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. We note that Sunright Limited (SGX:S71) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sunright

What Is Sunright's Net Debt?

The image below, which you can click on for greater detail, shows that at July 2023 Sunright had debt of S$31.7m, up from S$8.76m in one year. However, it does have S$92.2m in cash offsetting this, leading to net cash of S$60.5m.

How Strong Is Sunright's Balance Sheet?

According to the last reported balance sheet, Sunright had liabilities of S$27.9m due within 12 months, and liabilities of S$21.7m due beyond 12 months. On the other hand, it had cash of S$92.2m and S$21.0m worth of receivables due within a year. So it can boast S$63.6m 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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.

Over 12 months, Sunright made a loss at the EBIT level, and saw its revenue drop to S$93m, which is a fall of 11%. We would much prefer see growth.

So How Risky Is Sunright?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Sunright had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of S$6.2m and booked a S$3.1m accounting loss. With only S$60.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example Sunright has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.