Hebei Yangyuan ZhiHui Beverage (SHSE:603156) Seems To Use Debt Rather Sparingly

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. As with many other companies Hebei Yangyuan ZhiHui Beverage Co., Ltd. (SHSE:603156) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hebei Yangyuan ZhiHui Beverage

How Much Debt Does Hebei Yangyuan ZhiHui Beverage Carry?

The image below, which you can click on for greater detail, shows that Hebei Yangyuan ZhiHui Beverage had debt of CN¥314.0m at the end of June 2024, a reduction from CN¥1.06b over a year. But on the other hand it also has CN¥5.26b in cash, leading to a CN¥4.95b net cash position.

How Healthy Is Hebei Yangyuan ZhiHui Beverage's Balance Sheet?

The latest balance sheet data shows that Hebei Yangyuan ZhiHui Beverage had liabilities of CN¥3.07b due within a year, and liabilities of CN¥160.5m falling due after that. On the other hand, it had cash of CN¥5.26b and CN¥194.8m worth of receivables due within a year. So it actually has CN¥2.23b more liquid assets than total liabilities.

This short term liquidity is a sign that Hebei Yangyuan ZhiHui Beverage could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hebei Yangyuan ZhiHui Beverage boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Hebei Yangyuan ZhiHui Beverage 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hebei Yangyuan ZhiHui Beverage will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hebei Yangyuan ZhiHui Beverage 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 most recent three years, Hebei Yangyuan ZhiHui Beverage recorded free cash flow worth 73% 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

While it is always sensible to investigate a company's debt, in this case Hebei Yangyuan ZhiHui Beverage has CN¥4.95b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.4b, being 73% of its EBIT. So is Hebei Yangyuan ZhiHui Beverage's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Hebei Yangyuan ZhiHui Beverage that you should be aware of.

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.