These 4 Measures Indicate That PETRONAS Gas Berhad (KLSE:PETGAS) Is Using Debt Safely

Warren Buffett famously said, '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. We can see that PETRONAS Gas Berhad (KLSE:PETGAS) does use debt in its business. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 December 2021 PETRONAS Gas Berhad had RM2.02b of debt, an increase on RM1.70b, over one year. However, its balance sheet shows it holds RM3.78b in cash, so it actually has RM1.77b net cash.

How Strong Is PETRONAS Gas Berhad's Balance Sheet?

The latest balance sheet data shows that PETRONAS Gas Berhad had liabilities of RM1.30b due within a year, and liabilities of RM4.55b falling due after that. On the other hand, it had cash of RM3.78b and RM860.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM1.20b.

Given PETRONAS Gas Berhad has a market capitalization of RM33.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

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'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. 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 generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that PETRONAS Gas Berhad has RM1.77b in net cash. The cherry on top was that in converted 89% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with PETRONAS Gas Berhad (including 1 which shouldn't be ignored) .

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.