Here's Why PETRONAS Gas Berhad (KLSE:PETGAS) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies PETRONAS Gas Berhad (KLSE:PETGAS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for PETRONAS Gas Berhad

What Is PETRONAS Gas Berhad's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 PETRONAS Gas Berhad had debt of RM2.13b, up from RM1.84b in one year. But on the other hand it also has RM3.74b in cash, leading to a RM1.60b net cash position.

How Healthy Is PETRONAS Gas Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PETRONAS Gas Berhad had liabilities of RM1.17b due within 12 months and liabilities of RM4.65b due beyond that. Offsetting these obligations, it had cash of RM3.74b as well as receivables valued at RM824.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM1.26b.

Since publicly traded PETRONAS Gas Berhad shares are worth a total of RM32.3b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

But the other side of the story is that PETRONAS Gas Berhad saw its EBIT decline by 10.0% over the last year. 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 Gas Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, PETRONAS Gas Berhad generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that PETRONAS Gas Berhad has RM1.60b in net cash. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in RM2.2b. 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 instance, we've identified 1 warning sign for PETRONAS Gas Berhad that you should be aware of.

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.