The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Shandong Bohui Paper Industry Co.,Ltd. (SHSE:600966) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shandong Bohui Paper IndustryLtd

What Is Shandong Bohui Paper IndustryLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Shandong Bohui Paper IndustryLtd had CN¥7.40b of debt, an increase on CN¥6.02b, over one year. However, it does have CN¥2.91b in cash offsetting this, leading to net debt of about CN¥4.49b.

How Strong Is Shandong Bohui Paper IndustryLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shandong Bohui Paper IndustryLtd had liabilities of CN¥13.5b due within 12 months and liabilities of CN¥2.72b due beyond that. On the other hand, it had cash of CN¥2.91b and CN¥1.95b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥11.3b.

When you consider that this deficiency exceeds the company's CN¥8.65b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Shandong Bohui Paper IndustryLtd 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.

In the last year Shandong Bohui Paper IndustryLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 5.9%, to CN¥18b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Shandong Bohui Paper IndustryLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥467m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥1.5b in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Shandong Bohui Paper IndustryLtd that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.