Is Tsingtao Brewery (HKG:168) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Tsingtao Brewery Company Limited (HKG:168) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Tsingtao Brewery

What Is Tsingtao Brewery's Debt?

The image below, which you can click on for greater detail, shows that Tsingtao Brewery had debt of CN¥240.0m at the end of June 2022, a reduction from CN¥450.3m over a year. But on the other hand it also has CN¥28.1b in cash, leading to a CN¥27.8b net cash position.

How Strong Is Tsingtao Brewery's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tsingtao Brewery had liabilities of CN¥20.3b due within 12 months and liabilities of CN¥4.42b due beyond that. Offsetting these obligations, it had cash of CN¥28.1b as well as receivables valued at CN¥1.10b due within 12 months. So it actually has CN¥4.39b more liquid assets than total liabilities.

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

The good news is that Tsingtao Brewery has increased its EBIT by 9.7% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Happily for any shareholders, Tsingtao Brewery actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tsingtao Brewery has net cash of CN¥27.8b, as well as more liquid assets than liabilities. The cherry on top was that in converted 140% of that EBIT to free cash flow, bringing in CN¥4.0b. So is Tsingtao Brewery's debt a risk? It doesn't seem so to us. 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. For example - Tsingtao Brewery has 1 warning sign we think you should be aware of.

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.