Sun Race Sturmey-Archer (TWSE:1526) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Sun Race Sturmey-Archer Corporation (TWSE:1526) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, 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.

See our latest analysis for Sun Race Sturmey-Archer

What Is Sun Race Sturmey-Archer's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Sun Race Sturmey-Archer had NT$947.7m of debt, an increase on NT$684.1m, over one year. On the flip side, it has NT$316.9m in cash leading to net debt of about NT$630.8m.

How Healthy Is Sun Race Sturmey-Archer's Balance Sheet?

According to the last reported balance sheet, Sun Race Sturmey-Archer had liabilities of NT$437.7m due within 12 months, and liabilities of NT$809.6m due beyond 12 months. On the other hand, it had cash of NT$316.9m and NT$56.4m worth of receivables due within a year. So it has liabilities totalling NT$874.1m more than its cash and near-term receivables, combined.

Sun Race Sturmey-Archer has a market capitalization of NT$1.61b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sun Race Sturmey-Archer's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sun Race Sturmey-Archer had a loss before interest and tax, and actually shrunk its revenue by 60%, to NT$818m. To be frank that doesn't bode well.

Caveat Emptor

While Sun Race Sturmey-Archer's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$30m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$268m of cash over the last year. So in short it's a really risky stock. 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 instance, we've identified 2 warning signs for Sun Race Sturmey-Archer (1 can't be ignored) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com