Does China Resources Gas Group (HKG:1193) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that China Resources Gas Group Limited (HKG:1193) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for China Resources Gas Group

What Is China Resources Gas Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 China Resources Gas Group had debt of HK$12.4b, up from HK$11.8b in one year. However, its balance sheet shows it holds HK$16.8b in cash, so it actually has HK$4.43b net cash.

How Healthy Is China Resources Gas Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Resources Gas Group had liabilities of HK$46.4b due within 12 months and liabilities of HK$2.93b due beyond that. Offsetting these obligations, it had cash of HK$16.8b as well as receivables valued at HK$12.4b due within 12 months. So its liabilities total HK$20.1b more than the combination of its cash and short-term receivables.

China Resources Gas Group has a very large market capitalization of HK$96.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, China Resources Gas Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, China Resources Gas Group grew its EBIT by 43% over the last twelve months, and that growth will make it easier to handle its 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 Gas Group 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While China Resources Gas Group 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 most recent three years, China Resources Gas Group recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While China Resources Gas Group does have more liabilities than liquid assets, it also has net cash of HK$4.43b. And it impressed us with its EBIT growth of 43% over the last year. So we don't think China Resources Gas Group's use of debt is risky. We'd be very excited to see if China Resources Gas Group insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.

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.

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