Is PETRONAS Chemicals Group Berhad (KLSE:PCHEM) 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. Importantly, PETRONAS Chemicals Group Berhad (KLSE:PCHEM) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for PETRONAS Chemicals Group Berhad

What Is PETRONAS Chemicals Group Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 PETRONAS Chemicals Group Berhad had debt of RM2.53b, up from RM2.24b in one year. But on the other hand it also has RM16.5b in cash, leading to a RM14.0b net cash position.

How Strong Is PETRONAS Chemicals Group Berhad's Balance Sheet?

According to the last reported balance sheet, PETRONAS Chemicals Group Berhad had liabilities of RM5.13b due within 12 months, and liabilities of RM6.12b due beyond 12 months. On the other hand, it had cash of RM16.5b and RM2.96b worth of receivables due within a year. So it actually has RM8.22b more liquid assets than total liabilities.

This short term liquidity is a sign that PETRONAS Chemicals Group Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, PETRONAS Chemicals Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that PETRONAS Chemicals Group Berhad grew its EBIT by 152% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if PETRONAS Chemicals Group Berhad 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. While PETRONAS Chemicals Group Berhad 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, PETRONAS Chemicals Group Berhad recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case PETRONAS Chemicals Group Berhad has RM14.0b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in RM7.4b. So is PETRONAS Chemicals Group Berhad's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with PETRONAS Chemicals Group Berhad (including 1 which is concerning) .

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.

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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.