Jiangsu King's Luck Brewery Ltd (SHSE:603369) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Jiangsu King's Luck Brewery Joint-Stock Co.,Ltd. (SHSE:603369) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

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

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

As you can see below, at the end of March 2024, Jiangsu King's Luck Brewery Ltd had CN¥1.10b of debt, up from CN¥800.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥8.42b in cash, leading to a CN¥7.32b net cash position.

How Strong Is Jiangsu King's Luck Brewery Ltd's Balance Sheet?

The latest balance sheet data shows that Jiangsu King's Luck Brewery Ltd had liabilities of CN¥7.37b due within a year, and liabilities of CN¥201.5m falling due after that. On the other hand, it had cash of CN¥8.42b and CN¥116.2m worth of receivables due within a year. So it can boast CN¥960.7m 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¥60.2b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Jiangsu King's Luck Brewery Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Jiangsu King's Luck Brewery Ltd has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 46% 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¥7.32b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 27% over the last year. So is Jiangsu King's Luck Brewery Ltd'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. Case in point: We've spotted 2 warning signs for Jiangsu King's Luck Brewery Ltd you should be aware of, and 1 of them is concerning.

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.

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