We Think China General Plastics (TPE:1305) Can Manage Its Debt With Ease

Warren Buffett famously said, '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 can see that China General Plastics Corporation (TPE:1305) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China General Plastics

What Is China General Plastics's Debt?

As you can see below, China General Plastics had NT$550.0m of debt at September 2020, down from NT$900.0m a year prior. However, it does have NT$1.96b in cash offsetting this, leading to net cash of NT$1.41b.

A Look At China General Plastics' Liabilities

We can see from the most recent balance sheet that China General Plastics had liabilities of NT$1.80b falling due within a year, and liabilities of NT$1.92b due beyond that. Offsetting these obligations, it had cash of NT$1.96b as well as receivables valued at NT$1.50b due within 12 months. So it has liabilities totalling NT$267.5m more than its cash and near-term receivables, combined.

Having regard to China General Plastics' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$13.6b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, China General Plastics also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, China General Plastics grew its EBIT by 98% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine China General Plastics'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While China General Plastics 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, China General Plastics produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about China General Plastics's liabilities, but we can be reassured by the fact it has has net cash of NT$1.41b. And we liked the look of last year's 98% year-on-year EBIT growth. So we don't think China General Plastics's use of debt is risky. 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 China General Plastics's earnings per share history for free.

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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This article by Simply Wall St is general in nature. 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.
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