We Think Poly Plastic Masterbatch (SuZhou)Ltd (SZSE:300905) Can Stay On Top Of Its Debt

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. Importantly, Poly Plastic Masterbatch (SuZhou) Co.,Ltd (SZSE:300905) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Poly Plastic Masterbatch (SuZhou)Ltd

How Much Debt Does Poly Plastic Masterbatch (SuZhou)Ltd Carry?

As you can see below, at the end of June 2024, Poly Plastic Masterbatch (SuZhou)Ltd had CN¥26.9m of debt, up from CN¥13.9m a year ago. Click the image for more detail. But on the other hand it also has CN¥377.0m in cash, leading to a CN¥350.1m net cash position.

How Healthy Is Poly Plastic Masterbatch (SuZhou)Ltd's Balance Sheet?

We can see from the most recent balance sheet that Poly Plastic Masterbatch (SuZhou)Ltd had liabilities of CN¥193.7m falling due within a year, and liabilities of CN¥6.53m due beyond that. Offsetting these obligations, it had cash of CN¥377.0m as well as receivables valued at CN¥340.6m due within 12 months. So it can boast CN¥517.4m more liquid assets than total liabilities.

This surplus suggests that Poly Plastic Masterbatch (SuZhou)Ltd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Poly Plastic Masterbatch (SuZhou)Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Poly Plastic Masterbatch (SuZhou)Ltd grew its EBIT by 119% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Poly Plastic Masterbatch (SuZhou)Ltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Poly Plastic Masterbatch (SuZhou)Ltd 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, Poly Plastic Masterbatch (SuZhou)Ltd 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 it is always sensible to investigate a company's debt, in this case Poly Plastic Masterbatch (SuZhou)Ltd has CN¥350.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 119% over the last year. So we are not troubled with Poly Plastic Masterbatch (SuZhou)Ltd's debt use. 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 example Poly Plastic Masterbatch (SuZhou)Ltd has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.