We Think Chongqing Gas Group (SHSE:600917) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Chongqing Gas Group Corporation Ltd. (SHSE:600917) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Chongqing Gas Group

What Is Chongqing Gas Group's Net Debt?

As you can see below, Chongqing Gas Group had CN¥1.01b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥1.24b in cash to offset that, meaning it has CN¥227.6m net cash.

How Strong Is Chongqing Gas Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chongqing Gas Group had liabilities of CN¥3.39b due within 12 months and liabilities of CN¥1.38b due beyond that. On the other hand, it had cash of CN¥1.24b and CN¥857.2m worth of receivables due within a year. So its liabilities total CN¥2.67b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Chongqing Gas Group has a market capitalization of CN¥9.00b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Chongqing Gas Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Chongqing Gas Group grew its EBIT by 85% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Chongqing Gas Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Chongqing Gas Group 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. Over the last three years, Chongqing Gas Group saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although Chongqing Gas Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥227.6m. And it impressed us with its EBIT growth of 85% over the last year. So we don't have any problem with Chongqing Gas Group's use of debt. 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. Be aware that Chongqing Gas Group is showing 1 warning sign in our investment analysis , 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.