Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Sunshine Global Circuits Co.,Ltd. (SZSE:300739) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Sunshine Global CircuitsLtd Carry?

As you can see below, at the end of March 2024, Sunshine Global CircuitsLtd had CN¥840.9m of debt, up from CN¥395.4m a year ago. Click the image for more detail. But it also has CN¥1.06b in cash to offset that, meaning it has CN¥220.0m net cash.

How Healthy Is Sunshine Global CircuitsLtd's Balance Sheet?

According to the last reported balance sheet, Sunshine Global CircuitsLtd had liabilities of CN¥607.6m due within 12 months, and liabilities of CN¥960.2m due beyond 12 months. On the other hand, it had cash of CN¥1.06b and CN¥326.8m worth of receivables due within a year. So its liabilities total CN¥180.1m more than the combination of its cash and short-term receivables.

Since publicly traded Sunshine Global CircuitsLtd shares are worth a total of CN¥4.19b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Sunshine Global CircuitsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Sunshine Global CircuitsLtd's EBIT fell a jaw-dropping 45% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sunshine Global CircuitsLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sunshine Global CircuitsLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Sunshine Global CircuitsLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Sunshine Global CircuitsLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥220.0m. Despite the cash, we do find Sunshine Global CircuitsLtd's EBIT growth rate concerning, so we're not particularly comfortable with the stock. 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. Case in point: We've spotted 5 warning signs for Sunshine Global CircuitsLtd you should be aware of, and 2 of them are potentially serious.

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.

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