Is Tsingtao Brewery (HKG:168) using too much debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Tsingtao Brewery Company Limited (HKG:168) is in debt. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for Tsingtao Brewery

What is Tsingtao Brewery’s debt?

The image below, which you can click on for more details, shows that in March 2022, Tsingtao Brewery had a debt of 743.8 million Canadian yen, compared to 698.2 million Canadian yen in one year . But on the other hand, it also has 19.8 billion Canadian yen in cash, resulting in a net cash position of 19.0 billion domestic yen.

SEHK: 168 Debt to Equity History June 16, 2022

How strong is Tsingtao Brewery’s balance sheet?

According to the latest published balance sheet, Tsingtao Brewery had liabilities of 17.6 billion Canadian yen due within 12 months and liabilities of 4.41 billion domestic yen due beyond 12 months. On the other hand, it had a cash position of 19.8 billion Canadian yen and 830.4 million national yen of receivables due within one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 1.40 billion Canadian yen.

Given the size of Tsingtao Brewery, it appears its cash is well balanced against its total liabilities. So while it’s hard to imagine the 103.5 billion yen company struggling to find cash, we still think it’s worth keeping an eye on its balance sheet. While it has liabilities to note, Tsingtao Brewery also has more cash than debt, so we’re pretty confident it can safely manage its debt.

While Tsingtao Brewery doesn’t appear to have gained much on the EBIT line, at least earnings are holding steady for now. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Tsingtao Brewery’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cold hard cash, not with book profits. Although Tsingtao Brewery has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it’s building (or erodes) that treasury. balance. Over the past three years, Tsingtao Brewery has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summary

While it’s always a good idea to look at a company’s total liabilities, it’s very reassuring to know that Tsingtao Brewery has 19.0 billion yen of net cash. And it impressed us with a free cash flow of 2.8 billion Canadian yen, or 142% of its EBIT. We therefore do not believe that Tsingtao Brewery’s use of debt is risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 1 warning sign for Tsingtao Brewery of which you should be aware.

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

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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