Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Petroking Oilfield Services Limited (HKG:2178) uses debt. But does this debt worry shareholders?
What risk does debt carry?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Petro-king Oilfield Services
What is Petro-king Oilfield Services’ net debt?
The image below, which you can click on for more details, shows that Petro-king Oilfield Services had debt of HK$185.3 million at the end of December 2021, a reduction from 327.2 million HK over one year. On the other hand, he has HK$26.5 million in cash, resulting in a net debt of around HK$158.8 million.
How healthy is Petro-king Oilfield Services’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Petro-king Oilfield Services had liabilities of HK$355.3 million due within 12 months and liabilities of HK$70.5 million due beyond. In return, he had HK$26.5 million in cash and HK$326.2 million in debt due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables of HK$73.1 million.
Petro-king Oilfield Services has a market capitalization of HK$186.5 million, so it could very likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of Petro-king Oilfield Services that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Over 12 months, Petro-king Oilfield Services recorded a loss in EBIT and saw its turnover fall to HK$164 million, a decline of 58%. To be honest, that doesn’t bode well.
Not only have Petro-king Oilfield Services’ revenues fallen over the past twelve months, they have also produced negative earnings before interest and taxes (EBIT). Indeed, it lost a very considerable HK$53 million in EBIT. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. So we think its balance sheet is a little stretched, but not beyond repair. For example, we would not like to see a repeat of last year’s HK$94 million loss. So, to be frank, we think it’s risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 2 warning signs for Petro-king Oilfield Services of which you should be aware.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.