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. 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 Sun Hing Vision Group Holdings Limited (HKG:125) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Sun Hing Vision Group Holdings

How Much Debt Does Sun Hing Vision Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Sun Hing Vision Group Holdings had HK$45.5m of debt in September 2019, down from HK$47.5m, one year before. However, it does have HK$328.5m in cash offsetting this, leading to net cash of HK$282.9m.

A Look At Sun Hing Vision Group Holdings's Liabilities

According to the last reported balance sheet, Sun Hing Vision Group Holdings had liabilities of HK$270.2m due within 12 months, and liabilities of HK$25.8m due beyond 12 months. Offsetting these obligations, it had cash of HK$328.5m as well as receivables valued at HK$245.9m due within 12 months. So it actually has HK$278.4m more liquid assets than total liabilities.

This luscious liquidity implies that Sun Hing Vision Group Holdings's balance sheet is sturdy like a giant sequoia tree. On this view, it seems its balance sheet is as strong as a black-belt karate master. Succinctly put, Sun Hing Vision Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Sun Hing Vision Group Holdings's load is not too heavy, because its EBIT was down 66% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Sun Hing Vision Group Holdings'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, a company can only pay off debt with cold hard cash, not accounting profits. Sun Hing Vision Group Holdings 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. Happily for any shareholders, Sun Hing Vision Group Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sun Hing Vision Group Holdings has net cash of HK$282.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in HK$76m. So we don't think Sun Hing Vision Group Holdings's use of debt is risky. Given Sun Hing Vision Group Holdings has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.