Does China Resources Beer (Holdings) (HKG:291) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that China Resources Beer (Holdings) Company Limited (HKG:291) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China Resources Beer (Holdings)

What Is China Resources Beer (Holdings)'s Net Debt?

As you can see below, at the end of June 2023, China Resources Beer (Holdings) had CN¥8.88b of debt, up from CN¥800.0m a year ago. Click the image for more detail. But it also has CN¥12.9b in cash to offset that, meaning it has CN¥4.06b net cash.

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

Zooming in on the latest balance sheet data, we can see that China Resources Beer (Holdings) had liabilities of CN¥26.5b due within 12 months and liabilities of CN¥15.8b due beyond that. Offsetting this, it had CN¥12.9b in cash and CN¥1.61b in receivables that were due within 12 months. So its liabilities total CN¥27.7b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since China Resources Beer (Holdings) has a huge market capitalization of CN¥133.9b, 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, China Resources Beer (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that China Resources Beer (Holdings) has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, China Resources Beer (Holdings) recorded free cash flow worth a fulsome 82% 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

Although China Resources Beer (Holdings)'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¥4.06b. And it impressed us with free cash flow of CN¥3.1b, being 82% of its EBIT. So is China Resources Beer (Holdings)'s debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in China Resources Beer (Holdings), you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.