Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Budweiser Brewing Company APAC Limited (HKG:1876) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Budweiser Brewing Company APAC Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Budweiser Brewing Company APAC had US$332.0m of debt, an increase on US$180.0m, over one year. But it also has US$2.41b in cash to offset that, meaning it has US$2.07b net cash.

How Strong Is Budweiser Brewing Company APAC's Balance Sheet?

According to the last reported balance sheet, Budweiser Brewing Company APAC had liabilities of US$4.21b due within 12 months, and liabilities of US$684.0m due beyond 12 months. Offsetting this, it had US$2.41b in cash and US$819.0m in receivables that were due within 12 months. So its liabilities total US$1.67b more than the combination of its cash and short-term receivables.

Since publicly traded Budweiser Brewing Company APAC shares are worth a very impressive total of US$15.1b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Budweiser Brewing Company APAC boasts net cash, so it's fair to say it does not have a heavy debt load!

While Budweiser Brewing Company APAC 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 Budweiser Brewing Company APAC'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Budweiser Brewing Company APAC 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, Budweiser Brewing Company APAC generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Budweiser Brewing Company APAC does have more liabilities than liquid assets, it also has net cash of US$2.07b. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in US$839m. So we don't think Budweiser Brewing Company APAC's use of debt is risky. 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 Budweiser Brewing Company APAC .

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.