The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Tsingtao Brewery Company Limited (HKG:168) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tsingtao Brewery

How Much Debt Does Tsingtao Brewery Carry?

You can click the graphic below for the historical numbers, but it shows that Tsingtao Brewery had CN¥240.0m of debt in June 2022, down from CN¥450.3m, one year before. However, its balance sheet shows it holds CN¥28.1b in cash, so it actually has CN¥27.8b net cash.

How Healthy Is Tsingtao Brewery's Balance Sheet?

According to the last reported balance sheet, Tsingtao Brewery had liabilities of CN¥20.3b due within 12 months, and liabilities of CN¥4.42b due beyond 12 months. Offsetting this, it had CN¥28.1b in cash and CN¥1.10b in receivables that were due within 12 months. So it actually has CN¥4.39b more liquid assets than total liabilities.

This surplus suggests that Tsingtao Brewery has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tsingtao Brewery boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Tsingtao Brewery has increased its EBIT by 9.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tsingtao Brewery 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. Tsingtao Brewery 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. Happily for any shareholders, Tsingtao Brewery actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tsingtao Brewery has CN¥27.8b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 140% of that EBIT to free cash flow, bringing in CN¥4.0b. So is Tsingtao Brewery's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Tsingtao Brewery you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.