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. Importantly, Budweiser Brewing Company APAC Limited (HKG:1876) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for Budweiser Brewing Company APAC

What Is Budweiser Brewing Company APAC's Debt?

As you can see below, Budweiser Brewing Company APAC had US$177.0m of debt at June 2022, down from US$200.0m a year prior. But it also has US$1.87b in cash to offset that, meaning it has US$1.69b net cash.

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

Zooming in on the latest balance sheet data, we can see that Budweiser Brewing Company APAC had liabilities of US$4.35b due within 12 months and liabilities of US$754.0m due beyond that. On the other hand, it had cash of US$1.87b and US$652.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.58b.

Of course, Budweiser Brewing Company APAC has a titanic market capitalization of US$38.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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!

Fortunately, Budweiser Brewing Company APAC grew its EBIT by 6.4% in the last year, making that debt load look even more manageable. 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 Budweiser Brewing Company APAC 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Budweiser Brewing Company APAC 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 last three years, Budweiser Brewing Company APAC recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Budweiser Brewing Company APAC's liabilities, but we can be reassured by the fact it has has net cash of US$1.69b. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in US$1.3b. So is Budweiser Brewing Company APAC's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Budweiser Brewing Company APAC, 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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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.