Here's Why C&S PaperLtd (SZSE:002511) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, C&S Paper Co.,Ltd (SZSE:002511) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for C&S PaperLtd

What Is C&S PaperLtd's Debt?

As you can see below, at the end of September 2023, C&S PaperLtd had CN¥1.02b of debt, up from CN¥201.5m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.62b in cash, leading to a CN¥597.6m net cash position.

A Look At C&S PaperLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that C&S PaperLtd had liabilities of CN¥3.48b due within 12 months and liabilities of CN¥122.8m due beyond that. Offsetting this, it had CN¥1.62b in cash and CN¥1.04b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥948.9m.

Of course, C&S PaperLtd has a market capitalization of CN¥11.2b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, C&S PaperLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact C&S PaperLtd's saving grace is its low debt levels, because its EBIT has tanked 60% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if C&S PaperLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. C&S PaperLtd 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 three years, C&S PaperLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that C&S PaperLtd has CN¥597.6m in net cash. And it impressed us with free cash flow of CN¥436m, being 110% of its EBIT. So we don't have any problem with C&S PaperLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for C&S PaperLtd you should know about.

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.