We Think C&S PaperLtd (SZSE:002511) Can Manage Its Debt With Ease

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.' 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 C&S Paper Co.,Ltd (SZSE:002511) does use debt in its business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for C&S PaperLtd

What Is C&S PaperLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 C&S PaperLtd had debt of CN¥2.06b, up from CN¥1.17b in one year. However, its balance sheet shows it holds CN¥3.38b in cash, so it actually has CN¥1.32b net cash.

How Healthy Is C&S PaperLtd's Balance Sheet?

According to the last reported balance sheet, C&S PaperLtd had liabilities of CN¥4.52b due within 12 months, and liabilities of CN¥238.4m due beyond 12 months. On the other hand, it had cash of CN¥3.38b and CN¥1.17b worth of receivables due within a year. So its liabilities total CN¥211.9m more than the combination of its cash and short-term receivables.

Since publicly traded C&S PaperLtd shares are worth a total of CN¥9.04b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, C&S PaperLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that C&S PaperLtd has boosted its EBIT by 100%, thus reducing the spectre of future debt repayments. 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 C&S PaperLtd 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While C&S PaperLtd 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. Over the most recent three years, C&S PaperLtd recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about C&S PaperLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.32b. And we liked the look of last year's 100% year-on-year EBIT growth. So is C&S PaperLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for C&S PaperLtd (1 is a bit unpleasant) 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.