Is Jiangsu King's Luck Brewery Ltd (SHSE:603369) A Risky Investment?

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. We note that Jiangsu King's Luck Brewery Joint-Stock Co.,Ltd. (SHSE:603369) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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.

View 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 at September 2023 Jiangsu King's Luck Brewery Ltd had debt of CN¥1.10b, up from CN¥400.0m in one year. But on the other hand it also has CN¥7.54b in cash, leading to a CN¥6.44b net cash position.

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

Zooming in on the latest balance sheet data, we can see that Jiangsu King's Luck Brewery Ltd had liabilities of CN¥7.18b due within 12 months and liabilities of CN¥186.6m due beyond that. On the other hand, it had cash of CN¥7.54b and CN¥134.6m worth of receivables due within a year. So it actually has CN¥309.6m 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 while it's hard to imagine that the CN¥68.3b company is struggling for cash, we still think it's worth monitoring its 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!

Also positive, Jiangsu King's Luck Brewery Ltd grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiangsu King's Luck Brewery Ltd 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 company can only pay off debt with cold hard cash, not accounting profits. While Jiangsu King's Luck Brewery Ltd 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. During the last three years, Jiangsu King's Luck Brewery Ltd produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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¥6.44b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 26% over the last year. So we don't think Jiangsu King's Luck Brewery Ltd's use of debt is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Jiangsu King's Luck Brewery Ltd (including 1 which is a bit unpleasant) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.