Guangzhou Zhujiang Brewery (SZSE:002461) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Guangzhou Zhujiang Brewery Co., Ltd (SZSE:002461) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Guangzhou Zhujiang Brewery

How Much Debt Does Guangzhou Zhujiang Brewery Carry?

As you can see below, Guangzhou Zhujiang Brewery had CN¥1.08b of debt at March 2024, down from CN¥1.80b a year prior. However, it does have CN¥6.74b in cash offsetting this, leading to net cash of CN¥5.66b.

How Healthy Is Guangzhou Zhujiang Brewery's Balance Sheet?

According to the last reported balance sheet, Guangzhou Zhujiang Brewery had liabilities of CN¥2.98b due within 12 months, and liabilities of CN¥920.7m due beyond 12 months. On the other hand, it had cash of CN¥6.74b and CN¥27.0m worth of receivables due within a year. So it actually has CN¥2.87b more liquid assets than total liabilities.

This excess liquidity suggests that Guangzhou Zhujiang Brewery is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Guangzhou Zhujiang Brewery has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Guangzhou Zhujiang Brewery grew its EBIT at 15% 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 ultimately the future profitability of the business will decide if Guangzhou Zhujiang Brewery 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. 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. Over the most recent three years, Guangzhou Zhujiang Brewery recorded free cash flow worth 67% 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 Guangzhou Zhujiang Brewery has net cash of CN¥5.66b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥300m, being 67% of its EBIT. So we don't think Guangzhou Zhujiang Brewery's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Guangzhou Zhujiang Brewery 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.

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.