Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Jiangsu King's Luck Brewery Joint-Stock Co.,Ltd. (SHSE:603369) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jiangsu King's Luck Brewery Ltd's Debt?

The image below, which you can click on for greater detail, shows that Jiangsu King's Luck Brewery Ltd had debt of CN¥600.0m at the end of June 2024, a reduction from CN¥1.00b over a year. However, its balance sheet shows it holds CN¥6.84b in cash, so it actually has CN¥6.24b net cash.

How Healthy Is Jiangsu King's Luck Brewery Ltd's Balance Sheet?

We can see from the most recent balance sheet that Jiangsu King's Luck Brewery Ltd had liabilities of CN¥6.25b falling due within a year, and liabilities of CN¥178.9m due beyond that. Offsetting this, it had CN¥6.84b in cash and CN¥128.1m in receivables that were due within 12 months. So it can boast CN¥536.6m more liquid assets than total liabilities.

This state of affairs indicates that Jiangsu King's Luck Brewery Ltd'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¥48.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Jiangsu King's Luck Brewery Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Jiangsu King's Luck Brewery Ltd has been able to increase its EBIT by 24% in twelve months, making it easier to pay down 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 Jiangsu King's Luck Brewery Ltd's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. Jiangsu King's Luck Brewery Ltd 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. In the last three years, Jiangsu King's Luck Brewery Ltd's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu King's Luck Brewery Ltd has net cash of CN¥6.24b, as well as more liquid assets than liabilities. And we liked the look of last year's 24% year-on-year EBIT growth. So is Jiangsu King's Luck Brewery Ltd'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. Be aware that Jiangsu King's Luck Brewery Ltd is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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.

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.