Does Chongqing Sulian PlasticLtd (SZSE:301397) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Chongqing Sulian Plastic Co.,Ltd. (SZSE:301397) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Chongqing Sulian PlasticLtd

What Is Chongqing Sulian PlasticLtd's Debt?

As you can see below, at the end of September 2024, Chongqing Sulian PlasticLtd had CN¥250.0m of debt, up from CN¥12.0m a year ago. Click the image for more detail. But it also has CN¥999.7m in cash to offset that, meaning it has CN¥749.7m net cash.

How Strong Is Chongqing Sulian PlasticLtd's Balance Sheet?

The latest balance sheet data shows that Chongqing Sulian PlasticLtd had liabilities of CN¥526.9m due within a year, and liabilities of CN¥5.26m falling due after that. On the other hand, it had cash of CN¥999.7m and CN¥444.3m worth of receivables due within a year. So it actually has CN¥911.8m more liquid assets than total liabilities.

It's good to see that Chongqing Sulian PlasticLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Chongqing Sulian PlasticLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Chongqing Sulian PlasticLtd if management cannot prevent a repeat of the 28% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Chongqing Sulian PlasticLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Chongqing Sulian PlasticLtd 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. Over the last three years, Chongqing Sulian PlasticLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Chongqing Sulian PlasticLtd has net cash of CN¥749.7m, as well as more liquid assets than liabilities. So we are not troubled with Chongqing Sulian PlasticLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Chongqing Sulian PlasticLtd (including 1 which shouldn't be ignored) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.