Anheuser-Busch (NYSE:BUD) recently announced record sales and earnings for the second quarter on higher volume and revenue per barrel. Favorable market conditions allowed the beer maker to continue its steady price increases, boosting gross margins to nearly 42% in the second quarter. Net income for the quarter rose 6.5%, while earnings per share jumped 10.7% over 2003.

Read that last sentence again. Anheuser-Busch's EPS growth has outpaced net income growth for more than a decade, thanks to a relentless reduction in outstanding shares. In 1995 the company had more than a million outstanding shares. Last quarter, that number was 800,000.

The 20% decline in outstanding shares has had a major effect on the company's capital structure. Anheuser-Busch has reduced the equity on its balance sheet to just 18% of total assets, from 39% in 1996, while debt has risen from 31% to 50% of total assets over that time. Management, along with the board of directors, has obviously made a conscious decision to alter the brewer's capital structure, and while it's boosted EPS over the years, this effort has left the company with a good deal of leverage.

Investors like to see share repurchases, an alternative to dividends for distributing earnings to shareholders, but Anheuser-Busch is pushing the limits of rationality. If your company is flush with cash on a strong balance sheet, such as Microsoft (NASDAQ:MSFT), big distributions are acceptable. Such is not the case with Anheuser-Busch. Total equity approximately equals the common stock and paid in capital balances, meaning just about every penny of historical retained earnings has been used to repurchase stock, leaving nothing for reinvestment in the company.

As we found out in the Harbin Brewery battle, future growth in the beer industry will come at a hefty price. Not to mention that the Coors (NYSE:RKY)-Molson merger announcement and the resurgence of SABMiller (part of the Altria (NYSE:MO) portfolio) foreshadow tougher competition on the horizon. If Anheuser-Busch wants to maintain its lead and pursue growth opportunities, at some point it will need more capital than it can borrow, especially if it's going to move aggressively into China.

Given its strong free cash flow, the likelihood of financial distress at Anheuser-Busch is small, but when the company finally stops going to the well for more debt, the share repurchases will slow or stop, slamming the brakes on EPS growth. Investors need to be ready.

Fool contributor Chris Mallon owns shares of Anheuser-Busch, Altria, and Microsoft through his private investment partnership.