Is Yantai Changyu Pioneer Wine (SZSE:000869) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Yantai Changyu Pioneer Wine Company Limited (SZSE:000869) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yantai Changyu Pioneer Wine

How Much Debt Does Yantai Changyu Pioneer Wine Carry?

You can click the graphic below for the historical numbers, but it shows that Yantai Changyu Pioneer Wine had CN¥295.9m of debt in June 2024, down from CN¥529.2m, one year before. However, its balance sheet shows it holds CN¥1.61b in cash, so it actually has CN¥1.31b net cash.

How Strong Is Yantai Changyu Pioneer Wine's Balance Sheet?

We can see from the most recent balance sheet that Yantai Changyu Pioneer Wine had liabilities of CN¥1.42b falling due within a year, and liabilities of CN¥142.4m due beyond that. On the other hand, it had cash of CN¥1.61b and CN¥416.5m worth of receivables due within a year. So it actually has CN¥459.5m more liquid assets than total liabilities.

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

On the other hand, Yantai Changyu Pioneer Wine's EBIT dived 17%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Yantai Changyu Pioneer Wine'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Yantai Changyu Pioneer Wine 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, Yantai Changyu Pioneer Wine actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yantai Changyu Pioneer Wine has CN¥1.31b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 134% of that EBIT to free cash flow, bringing in CN¥710m. So we don't have any problem with Yantai Changyu Pioneer Wine's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Yantai Changyu Pioneer Wine .

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.