Beijing Tongrentang (SHSE:600085) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Beijing Tongrentang Co., Ltd (SHSE:600085) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, 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.

See our latest analysis for Beijing Tongrentang

What Is Beijing Tongrentang's Net Debt?

As you can see below, Beijing Tongrentang had CN¥2.00b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥12.9b in cash to offset that, meaning it has CN¥10.9b net cash.

A Look At Beijing Tongrentang's Liabilities

Zooming in on the latest balance sheet data, we can see that Beijing Tongrentang had liabilities of CN¥7.07b due within 12 months and liabilities of CN¥2.52b due beyond that. Offsetting this, it had CN¥12.9b in cash and CN¥2.21b in receivables that were due within 12 months. So it can boast CN¥5.47b more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Tongrentang could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Beijing Tongrentang has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Beijing Tongrentang has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Beijing Tongrentang's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Beijing Tongrentang may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Beijing Tongrentang recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing Tongrentang has net cash of CN¥10.9b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.8b, being 98% of its EBIT. So we don't think Beijing Tongrentang's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Beijing Tongrentang you should know about.

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.