These 4 Measures Indicate That Guangzhou Zhujiang Brewery (SZSE:002461) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Guangzhou Zhujiang Brewery Co., Ltd (SZSE:002461) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Guangzhou Zhujiang Brewery

How Much Debt Does Guangzhou Zhujiang Brewery Carry?

As you can see below, Guangzhou Zhujiang Brewery had CN¥2.27b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥8.66b in cash to offset that, meaning it has CN¥6.39b net cash.

How Healthy Is Guangzhou Zhujiang Brewery's Balance Sheet?

According to the last reported balance sheet, Guangzhou Zhujiang Brewery had liabilities of CN¥4.57b due within 12 months, and liabilities of CN¥881.8m due beyond 12 months. On the other hand, it had cash of CN¥8.66b and CN¥35.0m worth of receivables due within a year. So it can boast CN¥3.24b more liquid assets than total liabilities.

It's good to see that Guangzhou Zhujiang Brewery has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any 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 positive, Guangzhou Zhujiang Brewery grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. 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.

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. During the last three years, Guangzhou Zhujiang Brewery produced sturdy free cash flow equating to 62% 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¥6.39b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 27% over the last year. So is Guangzhou Zhujiang Brewery's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Guangzhou Zhujiang Brewery, you may well want to click here to check an interactive graph of its earnings per share history.

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.