These 4 Measures Indicate That Yantai North Andre JuiceLtd (HKG:2218) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Yantai North Andre Juice Co.,Ltd. (HKG:2218) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Yantai North Andre JuiceLtd

What Is Yantai North Andre JuiceLtd's Debt?

As you can see below, at the end of March 2022, Yantai North Andre JuiceLtd had CN¥100.1m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥818.6m in cash to offset that, meaning it has CN¥718.6m net cash.

How Strong Is Yantai North Andre JuiceLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yantai North Andre JuiceLtd had liabilities of CN¥184.6m due within 12 months and liabilities of CN¥1.62m due beyond that. Offsetting this, it had CN¥818.6m in cash and CN¥258.4m in receivables that were due within 12 months. So it actually has CN¥890.8m more liquid assets than total liabilities.

This excess liquidity suggests that Yantai North Andre JuiceLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Yantai North Andre JuiceLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Yantai North Andre JuiceLtd grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yantai North Andre JuiceLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Yantai North Andre JuiceLtd 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. During the last three years, Yantai North Andre JuiceLtd produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Yantai North Andre JuiceLtd has net cash of CN¥718.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 24% over the last year. So is Yantai North Andre JuiceLtd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Yantai North Andre JuiceLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.