Is China Resources Beer (Holdings) (HKG:291) A Risky Investment?

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. As with many other companies China Resources Beer (Holdings) Company Limited (HKG:291) makes use of debt. But the real question is whether this debt is making the company risky.

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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China Resources Beer (Holdings)

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

As you can see below, China Resources Beer (Holdings) had CN¥1.38b of debt at June 2024, down from CN¥8.88b a year prior. However, its balance sheet shows it holds CN¥6.50b in cash, so it actually has CN¥5.12b net cash.

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

We can see from the most recent balance sheet that China Resources Beer (Holdings) had liabilities of CN¥25.3b falling due within a year, and liabilities of CN¥9.89b due beyond that. Offsetting this, it had CN¥6.50b in cash and CN¥3.49b in receivables that were due within 12 months. So it has liabilities totalling CN¥25.2b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since China Resources Beer (Holdings) has a huge market capitalization of CN¥77.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

China Resources Beer (Holdings)'s EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of 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 China Resources Beer (Holdings)'s ability to maintain a healthy balance sheet going forward. 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. While China Resources Beer (Holdings) 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, China Resources Beer (Holdings) produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While China Resources Beer (Holdings) does have more liabilities than liquid assets, it also has net cash of CN¥5.12b. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in CN¥2.6b. So we don't have any problem with China Resources Beer (Holdings)'s use of debt. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.