We Think PETRONAS Chemicals Group Berhad (KLSE:PCHEM) Can Stay On Top Of Its Debt

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 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?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 PETRONAS Chemicals Group Berhad

How Much Debt Does PETRONAS Chemicals Group Berhad Carry?

The image below, which you can click on for greater detail, shows that at December 2022 PETRONAS Chemicals Group Berhad had debt of RM2.72b, up from RM2.39b in one year. However, its balance sheet shows it holds RM8.89b in cash, so it actually has RM6.17b net cash.

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

According to the last reported balance sheet, PETRONAS Chemicals Group Berhad had liabilities of RM6.50b due within 12 months, and liabilities of RM9.20b due beyond 12 months. Offsetting this, it had RM8.89b in cash and RM3.66b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM3.15b.

Since publicly traded PETRONAS Chemicals Group Berhad shares are worth a very impressive total of RM54.4b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, PETRONAS Chemicals Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, PETRONAS Chemicals Group Berhad saw its EBIT drop by 5.4% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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. 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. During the last three years, PETRONAS Chemicals Group Berhad generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about PETRONAS Chemicals Group Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM6.17b. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in RM6.2b. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for PETRONAS Chemicals Group Berhad (of which 1 makes us a bit uncomfortable!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.