Is Petrol AD (BUL:PET) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Petrol AD (BUL:PET) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Petrol AD

What Is Petrol AD's Net Debt?

The chart below, which you can click on for greater detail, shows that Petrol AD had лв46.6m in debt in December 2020; about the same as the year before. However, it also had лв2.78m in cash, and so its net debt is лв43.8m.

A Look At Petrol AD's Liabilities

According to the last reported balance sheet, Petrol AD had liabilities of лв73.4m due within 12 months, and liabilities of лв46.4m due beyond 12 months. On the other hand, it had cash of лв2.78m and лв51.0m worth of receivables due within a year. So its liabilities total лв66.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the лв6.88m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Petrol AD would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Petrol AD will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Petrol AD made a loss at the EBIT level, and saw its revenue drop to лв395m, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Petrol AD's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable лв2.3m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost лв6.9m in the last year. So we're not very excited about owning this stock. Its too risky for us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Petrol AD is showing 3 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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