Does PETRONAS Gas Berhad (KLSE:PETGAS) Have A Healthy 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, PETRONAS Gas Berhad (KLSE:PETGAS) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for PETRONAS Gas Berhad

What Is PETRONAS Gas Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 PETRONAS Gas Berhad had RM2.57b of debt, an increase on RM2.26b, over one year. But on the other hand it also has RM3.29b in cash, leading to a RM726.5m net cash position.

A Look At PETRONAS Gas Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that PETRONAS Gas Berhad had liabilities of RM2.04b due within 12 months and liabilities of RM3.24b due beyond that. Offsetting this, it had RM3.29b in cash and RM1.01b in receivables that were due within 12 months. So it has liabilities totalling RM981.3m more than its cash and near-term receivables, combined.

Of course, PETRONAS Gas Berhad has a market capitalization of RM33.3b, so these liabilities are probably manageable. 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 Gas Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that PETRONAS Gas Berhad saw its EBIT decline by 9.8% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Gas 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. PETRONAS Gas 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 Gas Berhad produced sturdy free cash flow equating to 78% 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

We could understand if investors are concerned about PETRONAS Gas Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM726.5m. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in RM1.6b. So is PETRONAS Gas Berhad's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with PETRONAS Gas Berhad , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.