These 4 Measures Indicate That Eastroc Beverage(Group) (SHSE:605499) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Eastroc Beverage(Group) Co., Ltd. (SHSE:605499) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Eastroc Beverage(Group)

What Is Eastroc Beverage(Group)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Eastroc Beverage(Group) had CN¥6.84b of debt, an increase on CN¥4.44b, over one year. However, it does have CN¥9.45b in cash offsetting this, leading to net cash of CN¥2.62b.

A Look At Eastroc Beverage(Group)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Eastroc Beverage(Group) had liabilities of CN¥12.8b due within 12 months and liabilities of CN¥125.1m due beyond that. Offsetting these obligations, it had cash of CN¥9.45b as well as receivables valued at CN¥187.4m due within 12 months. So its liabilities total CN¥3.25b more than the combination of its cash and short-term receivables.

Since publicly traded Eastroc Beverage(Group) shares are worth a very impressive total of CN¥111.3b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Eastroc Beverage(Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Eastroc Beverage(Group) has boosted its EBIT by 64%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Eastroc Beverage(Group) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Eastroc Beverage(Group) 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. Over the last three years, Eastroc Beverage(Group) recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Eastroc Beverage(Group) has CN¥2.62b in net cash. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in CN¥3.0b. So is Eastroc Beverage(Group)'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 - Eastroc Beverage(Group) has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.