Here's Why Hebei Sinopack Electronic TechnologyLtd (SZSE:003031) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Hebei Sinopack Electronic Technology Co.,Ltd. (SZSE:003031) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hebei Sinopack Electronic TechnologyLtd

What Is Hebei Sinopack Electronic TechnologyLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Hebei Sinopack Electronic TechnologyLtd had CN¥154.0m of debt, an increase on none, over one year. But it also has CN¥3.76b in cash to offset that, meaning it has CN¥3.61b net cash.

A Look At Hebei Sinopack Electronic TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Hebei Sinopack Electronic TechnologyLtd had liabilities of CN¥1.38b falling due within a year, and liabilities of CN¥283.3m due beyond that. On the other hand, it had cash of CN¥3.76b and CN¥1.13b worth of receivables due within a year. So it can boast CN¥3.23b more liquid assets than total liabilities.

This excess liquidity suggests that Hebei Sinopack Electronic TechnologyLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Hebei Sinopack Electronic TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Hebei Sinopack Electronic TechnologyLtd's load is not too heavy, because its EBIT was down 24% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hebei Sinopack Electronic TechnologyLtd 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 Hebei Sinopack Electronic TechnologyLtd 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. Looking at the most recent three years, Hebei Sinopack Electronic TechnologyLtd recorded free cash flow of 27% of its EBIT, which is weaker 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 Hebei Sinopack Electronic TechnologyLtd has net cash of CN¥3.61b, as well as more liquid assets than liabilities. So we are not troubled with Hebei Sinopack Electronic TechnologyLtd'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 instance, we've identified 2 warning signs for Hebei Sinopack Electronic TechnologyLtd (1 is a bit concerning) 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.