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 note that Shandong Xinjufeng Technology Packaging Co., Ltd. (SZSE:301296) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Shandong Xinjufeng Technology Packaging Carry?

As you can see below, Shandong Xinjufeng Technology Packaging had CN¥231.4m of debt at September 2024, down from CN¥270.9m a year prior. However, it does have CN¥453.4m in cash offsetting this, leading to net cash of CN¥222.1m.

A Look At Shandong Xinjufeng Technology Packaging's Liabilities

The latest balance sheet data shows that Shandong Xinjufeng Technology Packaging had liabilities of CN¥796.0m due within a year, and liabilities of CN¥94.4m falling due after that. Offsetting these obligations, it had cash of CN¥453.4m as well as receivables valued at CN¥625.7m due within 12 months. So it can boast CN¥188.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Shandong Xinjufeng Technology Packaging could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shandong Xinjufeng Technology Packaging has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Shandong Xinjufeng Technology Packaging saw its EBIT decline by 3.3% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shandong Xinjufeng Technology Packaging 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shandong Xinjufeng Technology Packaging may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Shandong Xinjufeng Technology Packaging recorded free cash flow of 41% 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 Shandong Xinjufeng Technology Packaging has CN¥222.1m in net cash and a decent-looking balance sheet. So we are not troubled with Shandong Xinjufeng Technology Packaging's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Shandong Xinjufeng Technology Packaging, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.