David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Guangzhou Zhujiang Brewery Co., Ltd (SZSE:002461) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Guangzhou Zhujiang Brewery's Debt?

The image below, which you can click on for greater detail, shows that Guangzhou Zhujiang Brewery had debt of CN¥1.08b at the end of March 2024, a reduction from CN¥1.80b over a year. But it also has CN¥6.74b in cash to offset that, meaning it has CN¥5.66b net cash.

How Healthy Is Guangzhou Zhujiang Brewery's Balance Sheet?

The latest balance sheet data shows that Guangzhou Zhujiang Brewery had liabilities of CN¥2.98b due within a year, and liabilities of CN¥920.7m falling due after that. Offsetting these obligations, it had cash of CN¥6.74b as well as receivables valued at CN¥27.0m due within 12 months. So it actually has CN¥2.87b more liquid assets than total liabilities.

This surplus suggests that Guangzhou Zhujiang Brewery is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Guangzhou Zhujiang Brewery boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Guangzhou Zhujiang Brewery grew its EBIT at 15% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangzhou Zhujiang Brewery's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Guangzhou Zhujiang Brewery has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Guangzhou Zhujiang Brewery produced sturdy free cash flow equating to 67% 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 Guangzhou Zhujiang Brewery has net cash of CN¥5.66b, as well as more liquid assets than liabilities. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in CN¥300m. So we don't think Guangzhou Zhujiang Brewery's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Guangzhou Zhujiang Brewery you should be aware of.

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.

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