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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

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 PETRONAS Gas Berhad had RM1.40b of debt in June 2024, down from RM2.57b, one year before. But it also has RM2.52b in cash to offset that, meaning it has RM1.12b net cash.

A Look At PETRONAS Gas Berhad's Liabilities

The latest balance sheet data shows that PETRONAS Gas Berhad had liabilities of RM1.06b due within a year, and liabilities of RM3.12b falling due after that. Offsetting these obligations, it had cash of RM2.52b as well as receivables valued at RM1.00b due within 12 months. So it has liabilities totalling RM661.2m more than its cash and near-term receivables, combined.

Having regard to PETRONAS Gas Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the RM35.2b company is short on cash, but still worth keeping an eye on the balance sheet. 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.

PETRONAS Gas Berhad's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. 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 RM1.12b in net cash. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with PETRONAS Gas Berhad .

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.