China Resources Beer (Holdings) (HKG:291) Seems To Use Debt Rather Sparingly

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.' 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. Importantly, China Resources Beer (Holdings) Company Limited (HKG:291) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China Resources Beer (Holdings)

How Much Debt Does China Resources Beer (Holdings) Carry?

As you can see below, at the end of June 2022, China Resources Beer (Holdings) had CN¥800.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥14.4b in cash, leading to a CN¥13.6b net cash position.

How Healthy Is China Resources Beer (Holdings)'s Balance Sheet?

The latest balance sheet data shows that China Resources Beer (Holdings) had liabilities of CN¥23.2b due within a year, and liabilities of CN¥6.02b falling due after that. Offsetting this, it had CN¥14.4b in cash and CN¥1.11b in receivables that were due within 12 months. So it has liabilities totalling CN¥13.7b more than its cash and near-term receivables, combined.

Of course, China Resources Beer (Holdings) has a titanic market capitalization of CN¥137.3b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, China Resources Beer (Holdings) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that China Resources Beer (Holdings) grew its EBIT at 14% over the last year, further increasing its ability to manage 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 China Resources Beer (Holdings) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. China Resources Beer (Holdings) 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, China Resources Beer (Holdings) actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about China Resources Beer (Holdings)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥13.6b. And it impressed us with free cash flow of CN¥3.3b, being 117% of its EBIT. So we don't think China Resources Beer (Holdings)'s use of debt is risky. 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 China Resources Beer (Holdings)'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.