Does Tsingtao Brewery (HKG:168) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Tsingtao Brewery Company Limited (HKG:168) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tsingtao Brewery

What Is Tsingtao Brewery's Debt?

As you can see below, Tsingtao Brewery had CN¥225.4m of debt at December 2022, down from CN¥245.8m a year prior. But on the other hand it also has CN¥25.7b in cash, leading to a CN¥25.4b net cash position.

A Look At Tsingtao Brewery's Liabilities

According to the last reported balance sheet, Tsingtao Brewery had liabilities of CN¥19.7b due within 12 months, and liabilities of CN¥4.37b due beyond 12 months. On the other hand, it had cash of CN¥25.7b and CN¥1.38b worth of receivables due within a year. So it can boast CN¥3.01b more liquid assets than total liabilities.

This surplus suggests that Tsingtao Brewery has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tsingtao Brewery boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Tsingtao Brewery grew its EBIT by 28% 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 Tsingtao 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. Tsingtao Brewery 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, Tsingtao Brewery actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tsingtao Brewery has net cash of CN¥25.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥3.1b, being 125% of its EBIT. So we don't think Tsingtao 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. We've identified 1 warning sign with Tsingtao Brewery , and understanding them should be part of your investment process.

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.

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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.