Beijing Yanjing BreweryLtd (SZSE:000729) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Beijing Yanjing Brewery Co.,Ltd. (SZSE:000729) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beijing Yanjing BreweryLtd

How Much Debt Does Beijing Yanjing BreweryLtd Carry?

As you can see below, Beijing Yanjing BreweryLtd had CN¥1.76b of debt at September 2024, down from CN¥1.92b a year prior. However, it does have CN¥10.9b in cash offsetting this, leading to net cash of CN¥9.12b.

How Strong Is Beijing Yanjing BreweryLtd's Balance Sheet?

According to the last reported balance sheet, Beijing Yanjing BreweryLtd had liabilities of CN¥8.81b due within 12 months, and liabilities of CN¥211.9m due beyond 12 months. Offsetting this, it had CN¥10.9b in cash and CN¥223.9m in receivables that were due within 12 months. So it can boast CN¥2.08b more liquid assets than total liabilities.

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

Also good is that Beijing Yanjing BreweryLtd grew its EBIT at 13% 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 it is future earnings, more than anything, that will determine Beijing Yanjing BreweryLtd's ability to maintain a healthy balance sheet going forward. 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. While Beijing Yanjing BreweryLtd 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. Happily for any shareholders, Beijing Yanjing BreweryLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Yanjing BreweryLtd has CN¥9.12b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.4b, being 160% of its EBIT. So is Beijing Yanjing BreweryLtd's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Beijing Yanjing BreweryLtd .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.