PETRONAS Chemicals Group Berhad (KLSE:PCHEM) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 PETRONAS Chemicals Group Berhad (KLSE:PCHEM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out the opportunities and risks within the MY Chemicals industry.

How Much Debt Does PETRONAS Chemicals Group Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 PETRONAS Chemicals Group Berhad had RM2.81b of debt, an increase on RM2.38b, over one year. However, its balance sheet shows it holds RM19.1b in cash, so it actually has RM16.3b net cash.

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

The latest balance sheet data shows that PETRONAS Chemicals Group Berhad had liabilities of RM4.99b due within a year, and liabilities of RM7.57b falling due after that. Offsetting this, it had RM19.1b in cash and RM3.22b in receivables that were due within 12 months. So it can boast RM9.77b 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!

In addition to that, we're happy to report that PETRONAS Chemicals Group Berhad has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. PETRONAS Chemicals Group Berhad 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, PETRONAS Chemicals Group Berhad recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that PETRONAS Chemicals Group Berhad has net cash of RM16.3b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM7.2b, being 86% of its EBIT. 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with PETRONAS Chemicals Group Berhad (including 1 which is concerning) .

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.

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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.