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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Luzhou LaojiaoLtd

What Is Luzhou LaojiaoLtd's Debt?

The chart below, which you can click on for greater detail, shows that Luzhou LaojiaoLtd had CN¥12.5b in debt in June 2024; about the same as the year before. But on the other hand it also has CN¥36.1b in cash, leading to a CN¥23.6b net cash position.

How Healthy Is Luzhou LaojiaoLtd's Balance Sheet?

The latest balance sheet data shows that Luzhou LaojiaoLtd had liabilities of CN¥17.1b due within a year, and liabilities of CN¥11.2b falling due after that. Offsetting these obligations, it had cash of CN¥36.1b as well as receivables valued at CN¥4.13b due within 12 months. So it can boast CN¥11.9b 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. 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 20% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Luzhou LaojiaoLtd'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 company can only pay off debt with cold hard cash, not accounting profits. 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 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Luzhou LaojiaoLtd has net cash of CN¥23.6b, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So we don't think Luzhou LaojiaoLtd's use of debt is risky. 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 Luzhou LaojiaoLtd , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.