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

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.' 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. Importantly, China Resources Beer (Holdings) Company Limited (HKG:291) does carry debt. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?

As you can see below, at the end of December 2022, China Resources Beer (Holdings) had CN¥1.10b of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥10.4b in cash, leading to a CN¥9.33b net cash position.

A Look At China Resources Beer (Holdings)'s Liabilities

According to the last reported balance sheet, China Resources Beer (Holdings) had liabilities of CN¥23.7b due within 12 months, and liabilities of CN¥6.57b due beyond 12 months. Offsetting these obligations, it had cash of CN¥10.4b as well as receivables valued at CN¥2.84b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥17.0b.

Since publicly traded China Resources Beer (Holdings) shares are worth a very impressive total of CN¥148.2b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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!

Another good sign is that China Resources Beer (Holdings) has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. 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

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¥9.33b. And it impressed us with free cash flow of CN¥5.2b, being 138% of its EBIT. So is China Resources Beer (Holdings)'s debt a risk? It doesn't seem so to us. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.