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

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. Importantly, Tsingtao Brewery Company Limited (HKG:168) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tsingtao Brewery

What Is Tsingtao Brewery's Debt?

You can click the graphic below for the historical numbers, but it shows that Tsingtao Brewery had CN¥221.1m of debt in March 2023, down from CN¥743.8m, one year before. However, it does have CN¥22.8b in cash offsetting this, leading to net cash of CN¥22.6b.

A Look At Tsingtao Brewery's Liabilities

We can see from the most recent balance sheet that Tsingtao Brewery had liabilities of CN¥18.0b falling due within a year, and liabilities of CN¥4.33b due beyond that. Offsetting these obligations, it had cash of CN¥22.8b as well as receivables valued at CN¥269.1m due within 12 months. So it actually has CN¥701.0m more liquid assets than total liabilities.

Having regard to Tsingtao Brewery's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥114.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Tsingtao Brewery boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Tsingtao Brewery grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its 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 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 it is always sensible to investigate a company's debt, in this case Tsingtao Brewery has CN¥22.6b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in CN¥4.2b. So we don't think Tsingtao Brewery's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Tsingtao 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.