In This Article:
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Gas Group Limited (HKG:1193) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for China Resources Gas Group
What Is China Resources Gas Group's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2018 China Resources Gas Group had debt of HK$12.6b, up from HK$11.8b in one year. However, it does have HK$12.0b in cash offsetting this, leading to net debt of about HK$529.5m.
How Healthy Is China Resources Gas Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that China Resources Gas Group had liabilities of HK$34.2b due within 12 months and liabilities of HK$7.72b due beyond that. On the other hand, it had cash of HK$12.0b and HK$7.97b worth of receivables due within a year. So it has liabilities totalling HK$22.0b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since China Resources Gas Group has a huge market capitalization of HK$87.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. But either way, China Resources Gas Group has virtually no net debt, so it's fair to say it does not have a heavy debt load!
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.