Greatview Aseptic Packaging (HKG:468) Seems To Use Debt Rather Sparingly

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 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. We can see that Greatview Aseptic Packaging Company Limited (HKG:468) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.

See our latest analysis for Greatview Aseptic Packaging

What Is Greatview Aseptic Packaging's Debt?

The image below, which you can click on for greater detail, shows that Greatview Aseptic Packaging had debt of CN¥126.3m at the end of June 2023, a reduction from CN¥303.3m over a year. But it also has CN¥493.1m in cash to offset that, meaning it has CN¥366.7m net cash.

How Healthy Is Greatview Aseptic Packaging's Balance Sheet?

The latest balance sheet data shows that Greatview Aseptic Packaging had liabilities of CN¥1.06b due within a year, and liabilities of CN¥80.1m falling due after that. On the other hand, it had cash of CN¥493.1m and CN¥720.1m worth of receivables due within a year. So it actually has CN¥75.4m more liquid assets than total liabilities.

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

Fortunately, Greatview Aseptic Packaging grew its EBIT by 4.9% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Greatview Aseptic Packaging's ability to maintain a healthy balance sheet going forward. 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. Greatview Aseptic 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. Over the most recent three years, Greatview Aseptic Packaging recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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¥366.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥91m, being 68% of its EBIT. So is Greatview Aseptic Packaging's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Greatview Aseptic Packaging, you may well want to click here to check an interactive graph of its earnings per share history.

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.