Is PETRONAS Gas Berhad (KLSE:PETGAS) Using Too Much 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. 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.

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

See our latest analysis for PETRONAS Gas Berhad

What Is PETRONAS Gas Berhad's Net Debt?

As you can see below, PETRONAS Gas Berhad had RM1.40b of debt at March 2024, down from RM2.46b a year prior. But it also has RM2.35b in cash to offset that, meaning it has RM952.5m net cash.

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 RM1.16b due within 12 months and liabilities of RM3.13b due beyond that. Offsetting these obligations, it had cash of RM2.35b as well as receivables valued at RM1.00b due within 12 months. So it has liabilities totalling RM932.9m more than its cash and near-term receivables, combined.

Of course, PETRONAS Gas Berhad has a market capitalization of RM35.7b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, PETRONAS Gas Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

While PETRONAS Gas Berhad doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept 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 79% 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that PETRONAS Gas Berhad has RM952.5m in net cash. And it impressed us with free cash flow of RM2.0b, being 79% of its EBIT. So we don't think PETRONAS Gas Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that PETRONAS Gas Berhad is showing 1 warning sign in our investment analysis , 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.

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