Is Petro-king Oilfield Services (HKG:2178) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Petro-king Oilfield Services Limited (HKG:2178) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Petro-king Oilfield Services

What Is Petro-king Oilfield Services's Debt?

As you can see below, at the end of June 2023, Petro-king Oilfield Services had HK$206.4m of debt, up from HK$148.7m a year ago. Click the image for more detail. On the flip side, it has HK$22.2m in cash leading to net debt of about HK$184.1m.

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$376.5m due within 12 months and liabilities of HK$107.1m due beyond that. Offsetting this, it had HK$22.2m in cash and HK$316.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$145.4m.

Given this deficit is actually higher than the company's market capitalization of HK$131.2m, we think shareholders really should watch Petro-king Oilfield Services's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Petro-king Oilfield Services's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Petro-king Oilfield Services wasn't profitable at an EBIT level, but managed to grow its revenue by 117%, to HK$350m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

While we can certainly appreciate Petro-king Oilfield Services's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping HK$16m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through HK$1.3m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.