Zhejiang Great Shengda PackagingLtd (SHSE:603687) Has A Pretty 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. 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.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhejiang Great Shengda PackagingLtd

How Much Debt Does Zhejiang Great Shengda PackagingLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Zhejiang Great Shengda PackagingLtd had CN¥735.5m of debt, an increase on CN¥607.5m, over one year. But it also has CN¥1.61b in cash to offset that, meaning it has CN¥873.3m net cash.

A Look At Zhejiang Great Shengda PackagingLtd's Liabilities

According to the last reported balance sheet, Zhejiang Great Shengda PackagingLtd had liabilities of CN¥748.0m due within 12 months, and liabilities of CN¥662.5m due beyond 12 months. Offsetting this, it had CN¥1.61b in cash and CN¥598.1m in receivables that were due within 12 months. So it actually has CN¥796.3m more liquid assets than total liabilities.

This surplus suggests that Zhejiang Great Shengda PackagingLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang Great Shengda PackagingLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Zhejiang Great Shengda PackagingLtd has boosted its EBIT by 63%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zhejiang Great Shengda PackagingLtd 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.

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 saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

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¥873.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 63% year-on-year EBIT growth. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Zhejiang Great Shengda PackagingLtd (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.