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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Petro-king Oilfield Services Limited (HKG:2178) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Petro-king Oilfield Services

What Is Petro-king Oilfield Services's Net Debt?

The image below, which you can click on for greater detail, shows that Petro-king Oilfield Services had debt of HK$188.5m at the end of December 2023, a reduction from HK$227.4m over a year. On the flip side, it has HK$48.2m in cash leading to net debt of about HK$140.3m.

How Strong Is Petro-king Oilfield Services' Balance Sheet?

The latest balance sheet data shows that Petro-king Oilfield Services had liabilities of HK$433.1m due within a year, and liabilities of HK$87.7m falling due after that. On the other hand, it had cash of HK$48.2m and HK$366.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$105.8m.

This deficit is considerable relative to its market capitalization of HK$120.9m, so it does suggest shareholders should keep an eye on Petro-king Oilfield Services' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Petro-king Oilfield Services's earnings that will influence how the balance sheet holds up in the future. 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, Petro-king Oilfield Services saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Petro-king Oilfield Services produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$32m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$30m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 Petro-king Oilfield Services is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.