Howard Marks put it properly when he mentioned that, relatively than worrying about share worth volatility, ‘The risk of everlasting loss is the danger I fear about… and each sensible investor I do know worries about.’ So it appears the good cash is aware of that debt – which is normally concerned in bankruptcies – is a vital issue, once you assess how dangerous an organization is. We notice that Sunny Optical Technology (Group) Company Limited (HKG:2382) does have debt on its steadiness sheet. But ought to shareholders be nervous about its use of debt?

When Is Debt A Problem?

Debt and different liabilities turn into dangerous for a enterprise when it can’t simply fulfill these obligations, both with free money circulate or by elevating capital at a horny worth. Ultimately, if the corporate cannot fulfill its authorized obligations to repay debt, shareholders may stroll away with nothing. However, a extra normal (however nonetheless costly) state of affairs is the place an organization should dilute shareholders at an inexpensive share worth merely to get debt underneath management. Of course, loads of firms use debt to fund development, with none damaging penalties. When we look at debt ranges, we first take into account each money and debt ranges, collectively.

View our latest analysis for Sunny Optical Technology (Group)

What Is Sunny Optical Technology (Group)’s Net Debt?

As you’ll be able to see under, Sunny Optical Technology (Group) had CN¥5.72b of debt at June 2023, down from CN¥6.25b a yr prior. But it additionally has CN¥20.6b in money to offset that, that means it has CN¥14.9b web money.

How Strong Is Sunny Optical Technology (Group)’s Balance Sheet?

According to the final reported steadiness sheet, Sunny Optical Technology (Group) had liabilities of CN¥18.2b due inside 12 months, and liabilities of CN¥6.29b due past 12 months. Offsetting these obligations, it had money of CN¥20.6b in addition to receivables valued at CN¥6.30b due inside 12 months. So it might boast CN¥2.38b extra liquid property than whole liabilities.

This quick time period liquidity is an indication that Sunny Optical Technology (Group) may most likely repay its debt with ease, as its steadiness sheet is way from stretched. Simply put, the truth that Sunny Optical Technology (Group) has more money than debt is arguably indication that it might handle its debt safely.

The modesty of its debt load might turn into essential for Sunny Optical Technology (Group) if administration can’t stop a repeat of the 62% lower to EBIT during the last yr. Falling earnings (if the pattern continues) may finally make even modest debt fairly dangerous. The steadiness sheet is clearly the realm to concentrate on if you find yourself analysing debt. But in the end the long run profitability of the enterprise will resolve if Sunny Optical Technology (Group) can strengthen its steadiness sheet over time. So in the event you’re targeted on the long run you’ll be able to try this free report showing analyst profit forecasts.

Finally, a enterprise wants free money circulate to repay debt; accounting earnings simply do not lower it. While Sunny Optical Technology (Group) has web money on its steadiness sheet, it is nonetheless price having a look at its means to transform earnings earlier than curiosity and tax (EBIT) to free money circulate, to assist us perceive how rapidly it’s constructing (or eroding) that money steadiness. Over the final three years, Sunny Optical Technology (Group) really produced extra free money circulate than EBIT. That type of sturdy money technology warms our hearts like a pet in a bumblebee swimsuit.

Summing Up

While it’s all the time wise to analyze an organization’s debt, on this case Sunny Optical Technology (Group) has CN¥14.9b in web money and a decent-looking steadiness sheet. The cherry on high was that in transformed 117% of that EBIT to free money circulate, bringing in CN¥4.1b. So we’re not troubled with Sunny Optical Technology (Group)’s debt use. The steadiness sheet is clearly the realm to concentrate on if you find yourself analysing debt. However, not all funding threat resides inside the steadiness sheet – removed from it. These dangers could be onerous to identify. Every firm has them, and we have noticed 1 warning sign for Sunny Optical Technology (Group) you must find out about.

Of course, in the event you’re the kind of investor who prefers shopping for shares with out the burden of debt, then do not hesitate to find our exclusive list of net cash growth stocks, immediately.

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This article by Simply Wall St is basic in nature. We present commentary based mostly on historic information and analyst forecasts solely utilizing an unbiased methodology and our articles usually are not supposed to be monetary recommendation. It doesn’t represent a suggestion to purchase or promote any inventory, and doesn’t take account of your goals, or your monetary state of affairs. We intention to carry you long-term targeted evaluation pushed by elementary information. Note that our evaluation might not issue within the newest price-sensitive firm bulletins or qualitative materials. Simply Wall St has no place in any shares talked about.