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 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. Importantly, China Resources Beer (Holdings) Company Limited (HKG:291) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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)

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

As you can see below, at the end of June 2022, China Resources Beer (Holdings) had CN¥800.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥14.4b in cash, leading to a CN¥13.6b net cash position.

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

According to the last reported balance sheet, China Resources Beer (Holdings) had liabilities of CN¥23.2b due within 12 months, and liabilities of CN¥6.02b due beyond 12 months. Offsetting these obligations, it had cash of CN¥14.4b as well as receivables valued at CN¥1.11b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥13.7b.

Since publicly traded China Resources Beer (Holdings) shares are worth a very impressive total of CN¥156.1b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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!

And we also note warmly that China Resources Beer (Holdings) grew its EBIT by 10% last year, making its debt load easier to handle. 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 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, 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. Over the last three years, China Resources Beer (Holdings) actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about China Resources Beer (Holdings)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥13.6b. The cherry on top was that in converted 121% of that EBIT to free cash flow, bringing in CN¥3.5b. So is China Resources Beer (Holdings)'s debt a risk? It doesn't seem so to us. Another factor that would give us confidence in China Resources Beer (Holdings) would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.