Is Sunplus Technology (TWSE:2401) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Sunplus Technology Company Limited (TWSE:2401) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, 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 Sunplus Technology

How Much Debt Does Sunplus Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Sunplus Technology had NT$1.37b of debt in June 2024, down from NT$1.42b, one year before. But it also has NT$6.10b in cash to offset that, meaning it has NT$4.74b net cash.

A Look At Sunplus Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Sunplus Technology had liabilities of NT$2.46b due within 12 months and liabilities of NT$1.32b due beyond that. On the other hand, it had cash of NT$6.10b and NT$1.10b worth of receivables due within a year. So it actually has NT$3.42b more liquid assets than total liabilities.

This excess liquidity suggests that Sunplus Technology is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Sunplus Technology has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sunplus Technology 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 Sunplus Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to NT$6.1b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Sunplus Technology?

Although Sunplus Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$1.1b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Sunplus Technology (of which 1 makes us a bit uncomfortable!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.