Is China Resources Beer (Holdings) (HKG:291) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for China Resources Beer (Holdings)

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

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

According to the last reported balance sheet, China Resources Beer (Holdings) had liabilities of CN¥23.2b due within 12 months, and liabilities of CN¥6.02b due beyond 12 months. On the other hand, it had cash of CN¥14.4b and CN¥1.11b worth of receivables due within a year. So its liabilities total CN¥13.7b more than the combination of its cash and short-term receivables.

Of course, China Resources Beer (Holdings) has a titanic market capitalization of CN¥156.8b, 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. 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.

And we also note warmly that China Resources Beer (Holdings) grew its EBIT by 10% last year, making its debt load easier to handle. 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 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. 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) actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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. The cherry on top was that in converted 121% of that EBIT to free cash flow, bringing in CN¥3.5b. So is China Resources Beer (Holdings)'s debt a risk? It doesn't seem so to us. Another factor that would give us confidence in China Resources Beer (Holdings) would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.