Is Budweiser Brewing Company APAC (HKG:1876) Using Too Much 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. We note that Budweiser Brewing Company APAC Limited (HKG:1876) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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$100.0m at the end of December 2022, a reduction from US$118.0m over a year. However, it does have US$2.46b in cash offsetting this, leading to net cash of US$2.36b.

How Healthy Is Budweiser Brewing Company APAC's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Budweiser Brewing Company APAC had liabilities of US$4.42b due within 12 months and liabilities of US$748.0m due beyond that. Offsetting this, it had US$2.46b in cash and US$514.0m in receivables that were due within 12 months. So it has liabilities totalling US$2.19b more than its cash and near-term receivables, combined.

Of course, Budweiser Brewing Company APAC has a titanic market capitalization of US$41.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Budweiser Brewing Company APAC boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Budweiser Brewing Company APAC's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Budweiser Brewing Company APAC recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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$2.36b. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in US$1.1b. So we don't have any problem with Budweiser Brewing Company APAC's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Budweiser Brewing Company APAC, you may well want to click here to check an interactive graph of its earnings per share history.

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.