Is Petro-king Oilfield Services (HKG:2178) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Petro-king Oilfield Services Limited (HKG:2178) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Petro-king Oilfield Services

What Is Petro-king Oilfield Services's Debt?

As you can see below, Petro-king Oilfield Services had HK$148.7m of debt at June 2022, down from HK$285.2m a year prior. However, it also had HK$21.0m in cash, and so its net debt is HK$127.8m.

How Strong 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$298.6m due within 12 months and liabilities of HK$55.5m due beyond that. Offsetting this, it had HK$21.0m in cash and HK$260.7m in receivables that were due within 12 months. So its liabilities total HK$72.4m more than the combination of its cash and short-term receivables.

Petro-king Oilfield Services has a market capitalization of HK$129.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Petro-king Oilfield Services 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.

In the last year Petro-king Oilfield Services had a loss before interest and tax, and actually shrunk its revenue by 57%, to HK$161m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Petro-king Oilfield Services'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 HK$78m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$105m into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Petro-king Oilfield Services that you should be aware of before investing here.

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.