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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Sungrow Power Supply Co., Ltd. (SZSE:300274) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Sungrow Power Supply's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Sungrow Power Supply had CN¥18.3b of debt, an increase on CN¥11.1b, over one year. But it also has CN¥22.2b in cash to offset that, meaning it has CN¥3.87b net cash.

A Look At Sungrow Power Supply's Liabilities

The latest balance sheet data shows that Sungrow Power Supply had liabilities of CN¥56.0b due within a year, and liabilities of CN¥13.5b falling due after that. Offsetting these obligations, it had cash of CN¥22.2b as well as receivables valued at CN¥30.6b due within 12 months. So it has liabilities totalling CN¥16.6b more than its cash and near-term receivables, combined.

Of course, Sungrow Power Supply has a titanic market capitalization of CN¥165.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Sungrow Power Supply also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Sungrow Power Supply grew its EBIT at 19% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sungrow Power Supply can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Sungrow Power Supply 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. In the last three years, Sungrow Power Supply created free cash flow amounting to 18% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While Sungrow Power Supply does have more liabilities than liquid assets, it also has net cash of CN¥3.87b. And it impressed us with its EBIT growth of 19% over the last year. So we are not troubled with Sungrow Power Supply's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Sungrow Power Supply (including 1 which can't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.