Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Zhejiang Great Shengda Packaging Co.,Ltd. (SHSE:603687) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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 Zhejiang Great Shengda PackagingLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Zhejiang Great Shengda PackagingLtd had debt of CN¥735.5m, up from CN¥607.5m in one year. But it also has CN¥1.61b in cash to offset that, meaning it has CN¥873.3m net cash.

How Healthy Is Zhejiang Great Shengda PackagingLtd's Balance Sheet?

According to the last reported balance sheet, Zhejiang Great Shengda PackagingLtd had liabilities of CN¥748.0m due within 12 months, and liabilities of CN¥662.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.61b as well as receivables valued at CN¥598.1m due within 12 months. So it actually has CN¥796.3m more liquid assets than total liabilities.

This surplus suggests that Zhejiang Great Shengda PackagingLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Zhejiang Great Shengda PackagingLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Zhejiang Great Shengda PackagingLtd has boosted its EBIT by 63%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zhejiang Great Shengda PackagingLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zhejiang Great Shengda PackagingLtd 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. During the last three years, Zhejiang Great Shengda PackagingLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Great Shengda PackagingLtd has CN¥873.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 63% year-on-year EBIT growth. So we are not troubled with Zhejiang Great Shengda PackagingLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zhejiang Great Shengda PackagingLtd (of which 1 is a bit concerning!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.