We Think Luzhou LaojiaoLtd (SZSE:000568) 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.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Luzhou LaojiaoLtd

How Much Debt Does Luzhou LaojiaoLtd Carry?

The image below, which you can click on for greater detail, shows that Luzhou LaojiaoLtd had debt of CN¥12.5b at the end of September 2024, a reduction from CN¥13.1b over a year. However, it does have CN¥32.1b in cash offsetting this, leading to net cash of CN¥19.6b.

How Strong Is Luzhou LaojiaoLtd's Balance Sheet?

According to the last reported balance sheet, Luzhou LaojiaoLtd had liabilities of CN¥11.0b due within 12 months, and liabilities of CN¥9.95b due beyond 12 months. Offsetting this, it had CN¥32.1b in cash and CN¥4.57b in receivables that were due within 12 months. So it actually has CN¥15.8b more liquid assets than total liabilities.

This short term liquidity is a sign that Luzhou LaojiaoLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Luzhou LaojiaoLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Luzhou LaojiaoLtd grew its EBIT at 14% over the last year, further increasing its ability to manage 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'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. Luzhou LaojiaoLtd 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. During the last three years, Luzhou LaojiaoLtd produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. 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¥19.6b, as well as more liquid assets than liabilities. So we don't think Luzhou LaojiaoLtd's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Luzhou LaojiaoLtd 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.