Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Sunyard Technology Co.,Ltd (SHSE:600571) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Sunyard TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Sunyard TechnologyLtd had debt of CN¥78.0m, up from CN¥500.0k in one year. However, it does have CN¥470.3m in cash offsetting this, leading to net cash of CN¥392.3m.

How Healthy Is Sunyard TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sunyard TechnologyLtd had liabilities of CN¥327.3m due within 12 months and liabilities of CN¥8.62m due beyond that. Offsetting this, it had CN¥470.3m in cash and CN¥476.5m in receivables that were due within 12 months. So it actually has CN¥610.8m more liquid assets than total liabilities.

This surplus suggests that Sunyard TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Sunyard TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Sunyard TechnologyLtd turned things around in the last 12 months, delivering and EBIT of CN¥18m. 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 Sunyard TechnologyLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sunyard TechnologyLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Sunyard TechnologyLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sunyard TechnologyLtd has CN¥392.3m in net cash and a decent-looking balance sheet. So we don't have any problem with Sunyard TechnologyLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Sunyard TechnologyLtd , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.