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 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is C&S PaperLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 C&S PaperLtd had debt of CN¥1.62b, up from CN¥1.19b in one year. But it also has CN¥2.95b in cash to offset that, meaning it has CN¥1.33b net cash.

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

The latest balance sheet data shows that C&S PaperLtd had liabilities of CN¥4.02b due within a year, and liabilities of CN¥234.2m falling due after that. Offsetting this, it had CN¥2.95b in cash and CN¥1.10b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥198.8m.

This state of affairs indicates that C&S PaperLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥10.9b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, C&S PaperLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, C&S PaperLtd saw its EBIT drop by 2.1% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine C&S PaperLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. C&S PaperLtd 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. Over the last three years, C&S PaperLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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¥1.33b. And it impressed us with free cash flow of CN¥411m, being 103% of its EBIT. So we don't think C&S PaperLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with C&S PaperLtd .

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.