Guangzhou Zhujiang Brewery (SZSE:002461) Could Easily Take On More 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Guangzhou Zhujiang Brewery Co., Ltd (SZSE:002461) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Guangzhou Zhujiang Brewery

What Is Guangzhou Zhujiang Brewery's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Guangzhou Zhujiang Brewery had debt of CN¥1.60b, up from CN¥1.49b in one year. But on the other hand it also has CN¥7.25b in cash, leading to a CN¥5.65b net cash position.

How Strong Is Guangzhou Zhujiang Brewery's Balance Sheet?

The latest balance sheet data shows that Guangzhou Zhujiang Brewery had liabilities of CN¥3.54b due within a year, and liabilities of CN¥938.1m falling due after that. On the other hand, it had cash of CN¥7.25b and CN¥25.6m worth of receivables due within a year. So it actually has CN¥2.80b more liquid assets than total liabilities.

This surplus suggests that Guangzhou Zhujiang Brewery is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Guangzhou Zhujiang Brewery boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Guangzhou Zhujiang Brewery grew its EBIT by 20% last year, making its debt load easier to handle. 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 Guangzhou Zhujiang Brewery can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Guangzhou Zhujiang Brewery 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. During the last three years, Guangzhou Zhujiang Brewery produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangzhou Zhujiang Brewery has CN¥5.65b in net cash and a decent-looking balance sheet. And we liked the look of last year's 20% year-on-year EBIT growth. So is Guangzhou Zhujiang Brewery'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. For example, we've discovered 1 warning sign for Guangzhou Zhujiang Brewery that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.