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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Eastroc Beverage(Group) Co., Ltd. (SHSE:605499) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Eastroc Beverage(Group)

What Is Eastroc Beverage(Group)'s Net Debt?

As you can see below, at the end of September 2024, Eastroc Beverage(Group) had CN¥6.84b of debt, up from CN¥4.44b a year ago. Click the image for more detail. 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

The latest balance sheet data shows that Eastroc Beverage(Group) had liabilities of CN¥12.8b due within a year, and liabilities of CN¥125.1m falling due after that. On the other hand, it had cash of CN¥9.45b and CN¥187.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.25b.

Since publicly traded Eastroc Beverage(Group) shares are worth a very impressive total of CN¥111.2b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Eastroc Beverage(Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Eastroc Beverage(Group) grew its EBIT by 64% over the last twelve months, and that growth will make it easier to handle its debt. 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 Eastroc Beverage(Group)'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.

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 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. And it impressed us with free cash flow of CN¥3.0b, being 81% of its EBIT. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Eastroc Beverage(Group) , and understanding them should be part of your investment process.

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.