These 4 Measures Indicate That China Resources Beverage (Holdings) (HKG:2460) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that China Resources Beverage (Holdings) Company Limited (HKG:2460) does have debt on its balance sheet. But is this debt a concern to shareholders?

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

What Is China Resources Beverage (Holdings)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 China Resources Beverage (Holdings) had CN¥148.8m of debt, an increase on none, over one year. However, it does have CN¥10.6b in cash offsetting this, leading to net cash of CN¥10.5b.

A Look At China Resources Beverage (Holdings)'s Liabilities

We can see from the most recent balance sheet that China Resources Beverage (Holdings) had liabilities of CN¥6.32b falling due within a year, and liabilities of CN¥511.0m due beyond that. Offsetting these obligations, it had cash of CN¥10.6b as well as receivables valued at CN¥795.8m due within 12 months. So it can boast CN¥4.61b more liquid assets than total liabilities.

This excess liquidity suggests that China Resources Beverage (Holdings) is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that China Resources Beverage (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for China Resources Beverage (Holdings)

Another good sign is that China Resources Beverage (Holdings) has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if China Resources Beverage (Holdings) 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. China Resources Beverage (Holdings) 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, China Resources Beverage (Holdings) saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Resources Beverage (Holdings) has net cash of CN¥10.5b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 26% over the last year. So we don't have any problem with China Resources Beverage (Holdings)'s use of debt. 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 China Resources Beverage (Holdings) is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.