Is China Resources Gas Group (HKG:1193) 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.' 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. As with many other companies China Resources Gas Group Limited (HKG:1193) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for China Resources Gas Group

What Is China Resources Gas Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China Resources Gas Group had HK$8.44b of debt in June 2021, down from HK$11.8b, one year before. But on the other hand it also has HK$15.7b in cash, leading to a HK$7.25b net cash position.

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

According to the last reported balance sheet, China Resources Gas Group had liabilities of HK$46.4b due within 12 months, and liabilities of HK$2.93b due beyond 12 months. On the other hand, it had cash of HK$15.7b and HK$16.6b worth of receivables due within a year. So it has liabilities totalling HK$17.0b more than its cash and near-term receivables, combined.

Given China Resources Gas Group has a humongous market capitalization of HK$110.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, China Resources Gas Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

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. China Resources Gas Group 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. During the last three years, China Resources Gas Group produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

Although China Resources Gas Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$7.25b. And it impressed us with its EBIT growth of 43% over the last year. So is China Resources Gas Group's debt a risk? It doesn't seem so to us. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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