David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Fujian Qingshan Paper Industry Co., Ltd. (SHSE:600103) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

How Much Debt Does Fujian Qingshan Paper Industry Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Fujian Qingshan Paper Industry had debt of CN¥886.5m, up from CN¥678.9m in one year. But on the other hand it also has CN¥2.19b in cash, leading to a CN¥1.30b net cash position.

How Strong Is Fujian Qingshan Paper Industry's Balance Sheet?

We can see from the most recent balance sheet that Fujian Qingshan Paper Industry had liabilities of CN¥1.69b falling due within a year, and liabilities of CN¥190.7m due beyond that. Offsetting these obligations, it had cash of CN¥2.19b as well as receivables valued at CN¥852.5m due within 12 months. So it can boast CN¥1.16b more liquid assets than total liabilities.

This surplus suggests that Fujian Qingshan Paper Industry is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Fujian Qingshan Paper Industry has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Fujian Qingshan Paper Industry's saving grace is its low debt levels, because its EBIT has tanked 47% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Fujian Qingshan Paper Industry's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Fujian Qingshan Paper Industry 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. Looking at the most recent three years, Fujian Qingshan Paper Industry recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fujian Qingshan Paper Industry has CN¥1.30b in net cash and a decent-looking balance sheet. So we don't have any problem with Fujian Qingshan Paper Industry's use of debt. 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. Case in point: We've spotted 3 warning signs for Fujian Qingshan Paper Industry 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.