Luzhou LaojiaoLtd (SZSE:000568) Has A Rock Solid Balance Sheet

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 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. Importantly, Luzhou Laojiao Co.,Ltd (SZSE:000568) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Luzhou LaojiaoLtd

What Is Luzhou LaojiaoLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Luzhou LaojiaoLtd had CN¥13.1b of debt, an increase on CN¥4.04b, over one year. But it also has CN¥27.9b in cash to offset that, meaning it has CN¥14.8b net cash.

A Look At Luzhou LaojiaoLtd's Liabilities

According to the last reported balance sheet, Luzhou LaojiaoLtd had liabilities of CN¥9.43b due within 12 months, and liabilities of CN¥13.1b due beyond 12 months. On the other hand, it had cash of CN¥27.9b and CN¥4.99b worth of receivables due within a year. So it actually has CN¥10.3b more liquid assets than total liabilities.

This surplus suggests that Luzhou LaojiaoLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Luzhou LaojiaoLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Luzhou LaojiaoLtd has been able to increase its EBIT by 30% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Luzhou LaojiaoLtd can strengthen its balance sheet over time. 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. While Luzhou LaojiaoLtd 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. Over the most recent three years, Luzhou LaojiaoLtd recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Luzhou LaojiaoLtd has net cash of CN¥14.8b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 30% over the last year. So is Luzhou LaojiaoLtd'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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Luzhou LaojiaoLtd , and understanding them should be part of your investment process.

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.