Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 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 A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

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

You can click the graphic below for the historical numbers, but it shows that China Resources Beer (Holdings) had CN¥1.38b of debt in June 2024, down from CN¥8.88b, one year before. But on the other hand it also has CN¥6.50b in cash, leading to a CN¥5.12b net cash position.

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

We can see from the most recent balance sheet that China Resources Beer (Holdings) had liabilities of CN¥25.3b falling due within a year, and liabilities of CN¥9.89b due beyond that. Offsetting this, it had CN¥6.50b in cash and CN¥3.49b in receivables that were due within 12 months. So its liabilities total CN¥25.2b more than the combination of its cash and short-term receivables.

China Resources Beer (Holdings) has a market capitalization of CN¥68.2b, 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. 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.

But the other side of the story is that China Resources Beer (Holdings) saw its EBIT decline by 4.8% over the last year. 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 it is future earnings, more than anything, that will determine China Resources Beer (Holdings)'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. While China Resources Beer (Holdings) 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. Over the most recent three years, China Resources Beer (Holdings) recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.