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.' 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 note that Sunright Limited (SGX:S71) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sunright

How Much Debt Does Sunright Carry?

The image below, which you can click on for greater detail, shows that Sunright had debt of S$26.0m at the end of July 2024, a reduction from S$28.2m over a year. However, it does have S$99.6m in cash offsetting this, leading to net cash of S$73.6m.

How Strong Is Sunright's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sunright had liabilities of S$29.7m due within 12 months and liabilities of S$15.2m due beyond that. Offsetting these obligations, it had cash of S$99.6m as well as receivables valued at S$17.2m due within 12 months. So it can boast S$71.9m 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. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Sunright boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Sunright made a loss at the EBIT level, last year, it was also good to see that it generated S$14m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sunright's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Sunright 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 most recent year, Sunright recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sunright has S$73.6m in net cash and a strong balance sheet. So is Sunright's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Sunright that you should be aware of.

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.