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.' 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 Gas Berhad (KLSE:PETGAS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

What Is PETRONAS Gas Berhad's Debt?

The image below, which you can click on for greater detail, shows that PETRONAS Gas Berhad had debt of RM1.29b at the end of December 2024, a reduction from RM2.56b over a year. However, it does have RM2.60b in cash offsetting this, leading to net cash of RM1.31b.

A Look At PETRONAS Gas Berhad's Liabilities

The latest balance sheet data shows that PETRONAS Gas Berhad had liabilities of RM1.52b due within a year, and liabilities of RM3.00b falling due after that. On the other hand, it had cash of RM2.60b and RM985.2m worth of receivables due within a year. So its liabilities total RM933.2m more than the combination of its cash and short-term receivables.

Given PETRONAS Gas Berhad has a market capitalization of RM33.2b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, PETRONAS Gas Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for PETRONAS Gas Berhad

While PETRONAS Gas Berhad doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine PETRONAS Gas Berhad's ability to maintain a healthy balance sheet going forward. 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. While PETRONAS Gas 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 most recent three years, PETRONAS Gas Berhad recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 RM1.31b. And it impressed us with free cash flow of RM1.9b, being 79% of its EBIT. So is PETRONAS Gas Berhad's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - PETRONAS Gas Berhad has 1 warning sign we think you should be aware of.

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.