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.' 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. As with many other companies Sunray Engineering Group Limited (HKG:8616) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
View our latest analysis for Sunray Engineering Group
What Is Sunray Engineering Group's Net Debt?
The image below, which you can click on for greater detail, shows that Sunray Engineering Group had debt of HK$21.4m at the end of September 2024, a reduction from HK$23.1m over a year. However, its balance sheet shows it holds HK$44.2m in cash, so it actually has HK$22.8m net cash.
A Look At Sunray Engineering Group's Liabilities
According to the last reported balance sheet, Sunray Engineering Group had liabilities of HK$72.8m due within 12 months, and liabilities of HK$3.08m due beyond 12 months. Offsetting these obligations, it had cash of HK$44.2m as well as receivables valued at HK$144.8m due within 12 months. So it actually has HK$113.2m more liquid assets than total liabilities.
This luscious liquidity implies that Sunray Engineering Group's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Sunray Engineering Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sunray Engineering Group 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 Sunray Engineering Group had a loss before interest and tax, and actually shrunk its revenue by 23%, to HK$158m. To be frank that doesn't bode well.
So How Risky Is Sunray Engineering Group?
Although Sunray Engineering Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$8.5m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. 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. For instance, we've identified 3 warning signs for Sunray Engineering Group (2 don't sit too well with us) 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.