Does Zhejiang Great Shengda PackagingLtd (SHSE:603687) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that Zhejiang Great Shengda Packaging Co.,Ltd. (SHSE:603687) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhejiang Great Shengda PackagingLtd

What Is Zhejiang Great Shengda PackagingLtd's Debt?

The image below, which you can click on for greater detail, shows that Zhejiang Great Shengda PackagingLtd had debt of CN¥29.8m at the end of June 2024, a reduction from CN¥693.5m over a year. However, it does have CN¥1.27b in cash offsetting this, leading to net cash of CN¥1.24b.

How Strong Is Zhejiang Great Shengda PackagingLtd's Balance Sheet?

The latest balance sheet data shows that Zhejiang Great Shengda PackagingLtd had liabilities of CN¥673.1m due within a year, and liabilities of CN¥172.7m falling due after that. Offsetting this, it had CN¥1.27b in cash and CN¥563.6m in receivables that were due within 12 months. So it actually has CN¥988.0m more liquid assets than total liabilities.

This surplus suggests that Zhejiang Great Shengda PackagingLtd is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Zhejiang Great Shengda PackagingLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Zhejiang Great Shengda PackagingLtd if management cannot prevent a repeat of the 21% cut to EBIT 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 future earnings, more than anything, that will determine Zhejiang Great Shengda PackagingLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Zhejiang Great Shengda PackagingLtd 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, Zhejiang Great Shengda PackagingLtd recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Great Shengda PackagingLtd has net cash of CN¥1.24b, as well as more liquid assets than liabilities. So we don't have any problem with Zhejiang Great Shengda PackagingLtd'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. For instance, we've identified 3 warning signs for Zhejiang Great Shengda PackagingLtd that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.