Is Qinghai Huzhu TianYouDe Highland Barley Spirit (SZSE:002646) A Risky Investment?

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. We note that Qinghai Huzhu TianYouDe Highland Barley Spirit Co., Ltd. (SZSE:002646) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Qinghai Huzhu TianYouDe Highland Barley Spirit

What Is Qinghai Huzhu TianYouDe Highland Barley Spirit's Debt?

As you can see below, Qinghai Huzhu TianYouDe Highland Barley Spirit had CN¥109.5m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥643.6m in cash to offset that, meaning it has CN¥534.1m net cash.

A Look At Qinghai Huzhu TianYouDe Highland Barley Spirit's Liabilities

According to the last reported balance sheet, Qinghai Huzhu TianYouDe Highland Barley Spirit had liabilities of CN¥495.8m due within 12 months, and liabilities of CN¥42.7m due beyond 12 months. Offsetting this, it had CN¥643.6m in cash and CN¥37.3m in receivables that were due within 12 months. So it can boast CN¥142.4m more liquid assets than total liabilities.

This surplus suggests that Qinghai Huzhu TianYouDe Highland Barley Spirit has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Qinghai Huzhu TianYouDe Highland Barley Spirit has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Qinghai Huzhu TianYouDe Highland Barley Spirit grew its EBIT by 527% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Qinghai Huzhu TianYouDe Highland Barley Spirit'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 Qinghai Huzhu TianYouDe Highland Barley Spirit 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 last three years, Qinghai Huzhu TianYouDe Highland Barley Spirit recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Qinghai Huzhu TianYouDe Highland Barley Spirit has CN¥534.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 527% over the last year. So we don't have any problem with Qinghai Huzhu TianYouDe Highland Barley Spirit'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. Be aware that Qinghai Huzhu TianYouDe Highland Barley Spirit is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.