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.' 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 China Resources Beer (Holdings) Company Limited (HKG:291) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Resources Beer (Holdings)

How Much Debt Does China Resources Beer (Holdings) Carry?

The image below, which you can click on for greater detail, shows that China Resources Beer (Holdings) had debt of CN¥1.38b at the end of June 2024, a reduction from CN¥8.88b over a year. However, its balance sheet shows it holds CN¥6.50b in cash, so it actually has CN¥5.12b net cash.

How Healthy Is China Resources Beer (Holdings)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Resources Beer (Holdings) had liabilities of CN¥25.3b due within 12 months and liabilities of CN¥9.89b due beyond that. Offsetting these obligations, it had cash of CN¥6.50b as well as receivables valued at CN¥3.49b due within 12 months. So its liabilities total CN¥25.2b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because China Resources Beer (Holdings) is worth CN¥70.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, China Resources Beer (Holdings) also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, China Resources Beer (Holdings) saw its EBIT drop by 4.8% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 China Resources Beer (Holdings) 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. China Resources Beer (Holdings) 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, China Resources Beer (Holdings) produced sturdy free cash flow equating to 59% 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

Although China Resources Beer (Holdings)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥5.12b. So we are not troubled with China Resources Beer (Holdings)'s debt use. Over time, share prices tend to follow earnings per share, so if you're interested in China Resources Beer (Holdings), you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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