Shandong Xinjufeng Technology Packaging (SZSE:301296) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Shandong Xinjufeng Technology Packaging Co., Ltd. (SZSE:301296) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shandong Xinjufeng Technology Packaging

What Is Shandong Xinjufeng Technology Packaging's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shandong Xinjufeng Technology Packaging had CN¥270.9m of debt, an increase on CN¥43.2m, over one year. But it also has CN¥872.4m in cash to offset that, meaning it has CN¥601.5m net cash.

A Look At Shandong Xinjufeng Technology Packaging's Liabilities

We can see from the most recent balance sheet that Shandong Xinjufeng Technology Packaging had liabilities of CN¥655.5m falling due within a year, and liabilities of CN¥144.0m due beyond that. Offsetting these obligations, it had cash of CN¥872.4m as well as receivables valued at CN¥453.1m due within 12 months. So it actually has CN¥526.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Shandong Xinjufeng Technology Packaging could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shandong Xinjufeng Technology Packaging boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Shandong Xinjufeng Technology Packaging grew its EBIT by 8.8% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shandong Xinjufeng Technology Packaging's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shandong Xinjufeng Technology Packaging 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. In the last three years, Shandong Xinjufeng Technology Packaging's free cash flow amounted to 25% 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 Shandong Xinjufeng Technology Packaging has net cash of CN¥601.5m, as well as more liquid assets than liabilities. And it also grew its EBIT by 8.8% over the last year. So we are not troubled with Shandong Xinjufeng Technology Packaging's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shandong Xinjufeng Technology Packaging's earnings per share history for free.

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.