PETRONAS Chemicals Group Berhad (KLSE:PCHEM) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that PETRONAS Chemicals Group Berhad (KLSE:PCHEM) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 December 2021 PETRONAS Chemicals Group Berhad had debt of RM2.39b, up from RM2.19b in one year. However, its balance sheet shows it holds RM16.4b in cash, so it actually has RM14.0b net cash.

A Look At PETRONAS Chemicals Group Berhad's Liabilities

The latest balance sheet data shows that PETRONAS Chemicals Group Berhad had liabilities of RM4.95b due within a year, and liabilities of RM6.12b falling due after that. On the other hand, it had cash of RM16.4b and RM2.82b worth of receivables due within a year. So it actually has RM8.14b 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!

Better yet, PETRONAS Chemicals Group Berhad grew its EBIT by 219% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 91% 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 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 RM6.6b. So we don't think PETRONAS Chemicals Group Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that PETRONAS Chemicals Group Berhad is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.