Is Fujian Qingshan Paper Industry (SHSE:600103) A Risky Investment?

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. Importantly, Fujian Qingshan Paper Industry Co., Ltd. (SHSE:600103) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Fujian Qingshan Paper Industry

How Much Debt Does Fujian Qingshan Paper Industry Carry?

As you can see below, Fujian Qingshan Paper Industry had CN¥667.3m of debt at September 2024, down from CN¥777.5m a year prior. However, its balance sheet shows it holds CN¥1.98b in cash, so it actually has CN¥1.31b net cash.

How Healthy Is Fujian Qingshan Paper Industry's Balance Sheet?

The latest balance sheet data shows that Fujian Qingshan Paper Industry had liabilities of CN¥1.61b due within a year, and liabilities of CN¥139.2m falling due after that. On the other hand, it had cash of CN¥1.98b and CN¥923.3m worth of receivables due within a year. So it actually has CN¥1.16b more liquid assets than total liabilities.

This excess liquidity suggests that Fujian Qingshan Paper Industry is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Fujian Qingshan Paper Industry boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Fujian Qingshan Paper Industry grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Fujian Qingshan Paper Industry's earnings that will influence how the balance sheet holds up in the future. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Fujian Qingshan Paper Industry 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, Fujian Qingshan Paper Industry's free cash flow amounted to 38% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fujian Qingshan Paper Industry has net cash of CN¥1.31b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 21% over the last year. So we don't think Fujian Qingshan Paper Industry's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Fujian Qingshan Paper Industry that you should be aware of.

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.