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 Jiangsu King's Luck Brewery Joint-Stock Co.,Ltd. (SHSE:603369) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

How Much Debt Does Jiangsu King's Luck Brewery Ltd Carry?

The image below, which you can click on for greater detail, shows that Jiangsu King's Luck Brewery Ltd had debt of CN¥919.4m at the end of September 2024, a reduction from CN¥1.10b over a year. However, its balance sheet shows it holds CN¥7.68b in cash, so it actually has CN¥6.77b net cash.

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

According to the last reported balance sheet, Jiangsu King's Luck Brewery Ltd had liabilities of CN¥7.06b due within 12 months, and liabilities of CN¥195.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥7.68b as well as receivables valued at CN¥99.7m due within 12 months. So it actually has CN¥528.5m 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 while it's hard to imagine that the CN¥56.7b company is struggling for cash, we still think it's worth monitoring its 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 21% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Looking at the most recent three years, Jiangsu King's Luck Brewery Ltd recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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¥6.77b, as well as more liquid assets than liabilities. And we liked the look of last year's 21% year-on-year EBIT growth. So is Jiangsu King's Luck Brewery Ltd'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Jiangsu King's Luck Brewery Ltd (1 can't be ignored!) that you should be aware of before investing here.

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.