Is Budweiser Brewing Company APAC (HKG:1876) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Budweiser Brewing Company APAC Limited (HKG:1876) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Budweiser Brewing Company APAC

What Is Budweiser Brewing Company APAC's Net Debt?

The image below, which you can click on for greater detail, shows that Budweiser Brewing Company APAC had debt of US$118.0m at the end of December 2021, a reduction from US$169.0m over a year. But on the other hand it also has US$2.01b in cash, leading to a US$1.89b net cash position.

A Look At Budweiser Brewing Company APAC's Liabilities

According to the last reported balance sheet, Budweiser Brewing Company APAC had liabilities of US$4.69b due within 12 months, and liabilities of US$851.0m due beyond 12 months. Offsetting these obligations, it had cash of US$2.01b as well as receivables valued at US$512.0m due within 12 months. So it has liabilities totalling US$3.02b more than its cash and near-term receivables, combined.

Since publicly traded Budweiser Brewing Company APAC shares are worth a very impressive total of US$35.2b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Budweiser Brewing Company APAC also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Budweiser Brewing Company APAC grew its EBIT by 56% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Budweiser Brewing Company APAC 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. While Budweiser Brewing Company APAC has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Budweiser Brewing Company APAC produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Budweiser Brewing Company APAC's liabilities, but we can be reassured by the fact it has has net cash of US$1.89b. And we liked the look of last year's 56% year-on-year EBIT growth. So is Budweiser Brewing Company APAC's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Budweiser Brewing Company APAC's earnings per share history for free.

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.