These 4 Measures Indicate That Jiangsu King's Luck Brewery Ltd (SHSE:603369) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Jiangsu King's Luck Brewery Joint-Stock Co.,Ltd. (SHSE:603369) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 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 on the other hand it also has CN¥7.68b in cash, leading to a CN¥6.77b net cash position.

How Healthy 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¥7.06b 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¥55.5b 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!

Also positive, Jiangsu King's Luck Brewery Ltd grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Looking at the most recent three years, Jiangsu King's Luck Brewery Ltd recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu King's Luck Brewery Ltd has CN¥6.77b in net cash and a decent-looking balance sheet. And we liked the look of last year's 21% year-on-year EBIT growth. So we don't think Jiangsu King's Luck Brewery Ltd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Jiangsu King's Luck Brewery Ltd has 2 warning signs (and 1 which can't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.