Chongqing Brewery (SHSE:600132) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Chongqing Brewery Co., Ltd. (SHSE:600132) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Chongqing Brewery

How Much Debt Does Chongqing Brewery Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Chongqing Brewery had debt of CN¥41.5m, up from none in one year. However, it does have CN¥3.85b in cash offsetting this, leading to net cash of CN¥3.81b.

How Strong Is Chongqing Brewery's Balance Sheet?

The latest balance sheet data shows that Chongqing Brewery had liabilities of CN¥7.94b due within a year, and liabilities of CN¥541.0m falling due after that. Offsetting these obligations, it had cash of CN¥3.85b as well as receivables valued at CN¥131.7m due within 12 months. So its liabilities total CN¥4.51b more than the combination of its cash and short-term receivables.

Of course, Chongqing Brewery has a market capitalization of CN¥34.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Chongqing Brewery also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Chongqing Brewery grew its EBIT by 7.0% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Chongqing Brewery can strengthen its balance sheet over time. 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. While Chongqing Brewery 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. Over the most recent three years, Chongqing Brewery recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Chongqing Brewery's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥3.81b. The cherry on top was that in converted 79% of that EBIT to free cash flow, bringing in CN¥2.3b. So we don't think Chongqing Brewery's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Chongqing Brewery 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.