We Think Hebei Yangyuan ZhiHui Beverage (SHSE:603156) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Hebei Yangyuan ZhiHui Beverage Co., Ltd. (SHSE:603156) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hebei Yangyuan ZhiHui Beverage

What Is Hebei Yangyuan ZhiHui Beverage's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Hebei Yangyuan ZhiHui Beverage had debt of CN¥1.18b, up from CN¥661.0m in one year. But on the other hand it also has CN¥6.83b in cash, leading to a CN¥5.65b net cash position.

A Look At Hebei Yangyuan ZhiHui Beverage's Liabilities

According to the last reported balance sheet, Hebei Yangyuan ZhiHui Beverage had liabilities of CN¥2.94b due within 12 months, and liabilities of CN¥198.2m due beyond 12 months. On the other hand, it had cash of CN¥6.83b and CN¥262.8m worth of receivables due within a year. So it can boast CN¥3.96b more liquid assets than total liabilities.

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

The good news is that Hebei Yangyuan ZhiHui Beverage has increased its EBIT by 7.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Hebei Yangyuan ZhiHui Beverage 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, Hebei Yangyuan ZhiHui Beverage recorded free cash flow worth 80% 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 we empathize with investors who find debt concerning, you should keep in mind that Hebei Yangyuan ZhiHui Beverage has net cash of CN¥5.65b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.7b, being 80% of its EBIT. So is Hebei Yangyuan ZhiHui Beverage's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Hebei Yangyuan ZhiHui Beverage that you should be aware of.

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.