These 4 Measures Indicate That Budweiser Brewing Company APAC (HKG:1876) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Budweiser Brewing Company APAC Limited (HKG:1876) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Budweiser Brewing Company APAC

How Much Debt Does Budweiser Brewing Company APAC Carry?

The image below, which you can click on for greater detail, shows that Budweiser Brewing Company APAC had debt of US$200.0m at the end of June 2021, a reduction from US$736.0m over a year. But it also has US$1.42b in cash to offset that, meaning it has US$1.22b net cash.

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

We can see from the most recent balance sheet that Budweiser Brewing Company APAC had liabilities of US$4.74b falling due within a year, and liabilities of US$810.0m due beyond that. Offsetting this, it had US$1.42b in cash and US$687.0m in receivables that were due within 12 months. So its liabilities total US$3.44b more than the combination of its cash and short-term receivables.

Since publicly traded Budweiser Brewing Company APAC shares are worth a very impressive total of US$32.2b, it seems unlikely that this level of liabilities would be a major threat. 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 top of that, Budweiser Brewing Company APAC grew its EBIT by 47% 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 it is future earnings, more than anything, that will determine Budweiser Brewing Company APAC's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Budweiser Brewing Company APAC 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. During the last three years, Budweiser Brewing Company APAC produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Budweiser Brewing Company APAC's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.22b. And it impressed us with its EBIT growth of 47% over the last year. So we don't think Budweiser Brewing Company APAC's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 Budweiser Brewing Company APAC you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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