Would Sun Race Sturmey-Archer (TWSE:1526) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Sun Race Sturmey-Archer Corporation (TWSE:1526) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for Sun Race Sturmey-Archer

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

As you can see below, at the end of June 2024, Sun Race Sturmey-Archer had NT$959.4m of debt, up from NT$807.3m a year ago. Click the image for more detail. However, it also had NT$353.8m in cash, and so its net debt is NT$605.6m.

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$433.0m due within 12 months, and liabilities of NT$792.2m due beyond 12 months. Offsetting these obligations, it had cash of NT$353.8m as well as receivables valued at NT$79.0m due within 12 months. So its liabilities total NT$792.5m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Sun Race Sturmey-Archer has a market capitalization of NT$1.53b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Sun Race Sturmey-Archer made a loss at the EBIT level, and saw its revenue drop to NT$758m, which is a fall of 55%. 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. To be specific the EBIT loss came in at NT$32m. 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$47m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sun Race Sturmey-Archer is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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.