Greatview Aseptic Packaging (HKG:468) Has A Rock Solid 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 Greatview Aseptic Packaging Company Limited (HKG:468) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Greatview Aseptic Packaging

How Much Debt Does Greatview Aseptic Packaging Carry?

You can click the graphic below for the historical numbers, but it shows that Greatview Aseptic Packaging had CN¥205.6m of debt in December 2020, down from CN¥320.8m, one year before. But on the other hand it also has CN¥577.2m in cash, leading to a CN¥371.7m net cash position.

A Look At Greatview Aseptic Packaging's Liabilities

The latest balance sheet data shows that Greatview Aseptic Packaging had liabilities of CN¥1.02b due within a year, and liabilities of CN¥110.8m falling due after that. Offsetting this, it had CN¥577.2m in cash and CN¥584.9m in receivables that were due within 12 months. So it can boast CN¥32.5m more liquid assets than total liabilities.

This state of affairs indicates that Greatview Aseptic Packaging's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥4.55b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Greatview Aseptic Packaging has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Greatview Aseptic Packaging grew its EBIT at 15% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Greatview Aseptic 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Greatview Aseptic 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. During the last three years, Greatview Aseptic Packaging produced sturdy free cash flow equating to 80% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Greatview Aseptic Packaging has CN¥371.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥440m, being 80% of its EBIT. So we don't think Greatview Aseptic Packaging's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Greatview Aseptic Packaging you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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