Is Shandong Xinjufeng Technology Packaging (SZSE:301296) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Shandong Xinjufeng Technology Packaging Co., Ltd. (SZSE:301296) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shandong Xinjufeng Technology Packaging

What Is Shandong Xinjufeng Technology Packaging's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Shandong Xinjufeng Technology Packaging had CN¥201.8m of debt, an increase on CN¥187.8m, over one year. But it also has CN¥518.4m in cash to offset that, meaning it has CN¥316.6m net cash.

A Look At Shandong Xinjufeng Technology Packaging's Liabilities

According to the last reported balance sheet, Shandong Xinjufeng Technology Packaging had liabilities of CN¥687.1m due within 12 months, and liabilities of CN¥69.4m due beyond 12 months. Offsetting this, it had CN¥518.4m in cash and CN¥375.8m in receivables that were due within 12 months. So it actually has CN¥137.7m more liquid assets than total liabilities.

This surplus suggests that Shandong Xinjufeng Technology Packaging has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shandong Xinjufeng Technology Packaging has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Shandong Xinjufeng Technology Packaging has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shandong Xinjufeng Technology Packaging 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shandong Xinjufeng Technology Packaging 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 most recent three years, Shandong Xinjufeng Technology Packaging recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shandong Xinjufeng Technology Packaging has net cash of CN¥316.6m, as well as more liquid assets than liabilities. So we don't have any problem with Shandong Xinjufeng Technology Packaging's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Shandong Xinjufeng Technology Packaging, you may well want to click here to check an interactive graph of its earnings per share history.

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.