Is Greatview Aseptic Packaging (HKG:468) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Greatview Aseptic Packaging Company Limited (HKG:468) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that 468 is potentially undervalued!

What Is Greatview Aseptic Packaging's Debt?

As you can see below, at the end of June 2022, Greatview Aseptic Packaging had CN¥303.3m of debt, up from CN¥148.6m a year ago. Click the image for more detail. But on the other hand it also has CN¥585.1m in cash, leading to a CN¥281.8m net cash position.

How Healthy Is Greatview Aseptic Packaging's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Greatview Aseptic Packaging had liabilities of CN¥1.27b due within 12 months and liabilities of CN¥91.4m due beyond that. On the other hand, it had cash of CN¥585.1m and CN¥684.7m worth of receivables due within a year. So its liabilities total CN¥94.5m more than the combination of its cash and short-term receivables.

Since publicly traded Greatview Aseptic Packaging shares are worth a total of CN¥1.52b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Greatview Aseptic Packaging also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Greatview Aseptic Packaging's load is not too heavy, because its EBIT was down 43% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Greatview Aseptic Packaging can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Greatview Aseptic Packaging's liabilities, but we can be reassured by the fact it has has net cash of CN¥281.8m. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in CN¥261m. So we don't have any problem with Greatview Aseptic Packaging's use of debt. 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 example - Greatview Aseptic Packaging has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.