Petro-king Oilfield Services (HKG:2178) Is Making Moderate Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Petro-king Oilfield Services Limited (HKG:2178) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Net Debt?

The image below, which you can click on for greater detail, shows that Petro-king Oilfield Services had debt of HK$181.6m at the end of June 2024, a reduction from HK$206.4m over a year. On the flip side, it has HK$29.8m in cash leading to net debt of about HK$151.8m.

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$434.5m due within 12 months and liabilities of HK$66.4m due beyond that. Offsetting this, it had HK$29.8m in cash and HK$381.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$89.3m.

Petro-king Oilfield Services has a market capitalization of HK$150.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Petro-king Oilfield Services will need earnings to service that debt. 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 8.4%, to HK$379m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Petro-king Oilfield Services had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$17m. 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. 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. For example Petro-king Oilfield Services has 3 warning signs (and 2 which are significant) we think you should know about.

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.