Does Jiangsu King's Luck Brewery Ltd (SHSE:603369) Have A Healthy Balance Sheet?

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 Jiangsu King's Luck Brewery Joint-Stock Co.,Ltd. (SHSE:603369) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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.

See our latest analysis for Jiangsu King's Luck Brewery Ltd

What Is Jiangsu King's Luck Brewery Ltd's Net Debt?

The image below, which you can click on for greater detail, shows that Jiangsu King's Luck Brewery Ltd had debt of CN¥919.4m at the end of September 2024, a reduction from CN¥1.10b over a year. But it also has CN¥7.68b in cash to offset that, meaning it has CN¥6.77b net cash.

A Look At Jiangsu King's Luck Brewery Ltd's Liabilities

The latest balance sheet data shows that Jiangsu King's Luck Brewery Ltd had liabilities of CN¥7.06b due within a year, and liabilities of CN¥195.8m falling due after that. Offsetting this, it had CN¥7.68b in cash and CN¥99.7m in receivables that were due within 12 months. So it actually has CN¥528.5m more liquid assets than total liabilities.

This state of affairs indicates that Jiangsu King's Luck Brewery Ltd'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¥66.6b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Jiangsu King's Luck Brewery Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Jiangsu King's Luck Brewery Ltd has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Jiangsu King's Luck Brewery Ltd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jiangsu King's Luck Brewery Ltd 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. In the last three years, Jiangsu King's Luck Brewery Ltd's free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu King's Luck Brewery Ltd has net cash of CN¥6.77b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 21% over the last year. So is Jiangsu King's Luck Brewery Ltd's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 2 warning signs for Jiangsu King's Luck Brewery Ltd (1 is a bit unpleasant!) that you should be aware of before investing here.

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.