These 4 Measures Indicate That Tsingtao Brewery (HKG:168) Is Using Debt Safely

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.' 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. As with many other companies Tsingtao Brewery Company Limited (HKG:168) makes use of debt. But is this debt a concern to shareholders?

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. 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.

Check out our latest analysis for Tsingtao Brewery

How Much Debt Does Tsingtao Brewery Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Tsingtao Brewery had debt of CN¥1.30b, up from CN¥305.4m in one year. But it also has CN¥19.0b in cash to offset that, meaning it has CN¥17.7b net cash.

How Strong Is Tsingtao Brewery's Balance Sheet?

The latest balance sheet data shows that Tsingtao Brewery had liabilities of CN¥16.6b due within a year, and liabilities of CN¥4.50b falling due after that. On the other hand, it had cash of CN¥19.0b and CN¥270.3m worth of receivables due within a year. So its liabilities total CN¥1.86b more than the combination of its cash and short-term receivables.

This state of affairs indicates that Tsingtao Brewery's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥102.9b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Tsingtao Brewery also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Tsingtao Brewery grew its EBIT by 26% 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. 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 look at a company's total liabilities, it is very reassuring that Tsingtao Brewery has CN¥17.7b in net cash. The cherry on top was that in converted 149% of that EBIT to free cash flow, bringing in CN¥3.7b. So is Tsingtao Brewery's debt a risk? It doesn't seem so to us. 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. Be aware that Tsingtao Brewery is showing 1 warning sign in our investment analysis , you should know about...

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.