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

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When Is Debt Dangerous?

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 step when considering a company's debt levels is to consider its cash and debt together.

What Is China Resources Beer (Holdings)'s Debt?

As you can see below, China Resources Beer (Holdings) had CN¥2.15b of debt at December 2024, down from CN¥5.11b a year prior. However, it does have CN¥3.82b in cash offsetting this, leading to net cash of CN¥1.67b.

A Look At China Resources Beer (Holdings)'s Liabilities

The latest balance sheet data shows that China Resources Beer (Holdings) had liabilities of CN¥26.1b due within a year, and liabilities of CN¥7.67b falling due after that. Offsetting this, it had CN¥3.82b in cash and CN¥1.93b in receivables that were due within 12 months. So it has liabilities totalling CN¥28.0b more than its cash and near-term receivables, combined.

China Resources Beer (Holdings) has a very large market capitalization of CN¥88.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, China Resources Beer (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for China Resources Beer (Holdings)

China Resources Beer (Holdings)'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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While China Resources Beer (Holdings) does have more liabilities than liquid assets, it also has net cash of CN¥1.67b. So we are not troubled with China Resources Beer (Holdings)'s debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of China Resources Beer (Holdings)'s earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.