We Think Eastroc Beverage(Group) (SHSE:605499) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Eastroc Beverage(Group) Co., Ltd. (SHSE:605499) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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)

How Much Debt Does Eastroc Beverage(Group) Carry?

As you can see below, at the end of March 2024, Eastroc Beverage(Group) had CN¥3.70b of debt, up from CN¥3.49b a year ago. Click the image for more detail. But on the other hand it also has CN¥8.63b in cash, leading to a CN¥4.93b net cash position.

A Look At Eastroc Beverage(Group)'s Liabilities

According to the last reported balance sheet, Eastroc Beverage(Group) had liabilities of CN¥8.40b due within 12 months, and liabilities of CN¥427.0m due beyond 12 months. Offsetting this, it had CN¥8.63b in cash and CN¥97.8m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Eastroc Beverage(Group)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥86.7b company is short on cash, but still worth keeping an eye on the balance sheet. 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 32%, 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 92% 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

We could understand if investors are concerned about Eastroc Beverage(Group)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥4.93b. And it impressed us with free cash flow of CN¥2.5b, being 92% of its EBIT. So we don't think Eastroc Beverage(Group)'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Eastroc Beverage(Group) you should know about.

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.

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