Beijing Yanjing BreweryLtd (SZSE:000729) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. 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?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Beijing Yanjing BreweryLtd

What Is Beijing Yanjing BreweryLtd's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Beijing Yanjing BreweryLtd had debt of CN¥2.05b, up from CN¥1.72b in one year. However, it does have CN¥11.1b in cash offsetting this, leading to net cash of CN¥9.05b.

How Strong Is Beijing Yanjing BreweryLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Yanjing BreweryLtd had liabilities of CN¥9.20b due within 12 months and liabilities of CN¥215.2m due beyond that. Offsetting these obligations, it had cash of CN¥11.1b as well as receivables valued at CN¥289.0m due within 12 months. So it actually has CN¥1.98b more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Yanjing BreweryLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Beijing Yanjing BreweryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Beijing Yanjing BreweryLtd has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Beijing Yanjing BreweryLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Beijing Yanjing BreweryLtd 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, Beijing Yanjing BreweryLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing Yanjing BreweryLtd has net cash of CN¥9.05b, as well as more liquid assets than liabilities. The cherry on top was that in converted 211% of that EBIT to free cash flow, bringing in CN¥1.8b. So we don't think Beijing Yanjing BreweryLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Beijing Yanjing BreweryLtd you should be aware of.

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.