We Think Petro-king Oilfield Services (HKG:2178) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Petro-king Oilfield Services Limited (HKG:2178) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Petro-king Oilfield Services

How Much Debt Does Petro-king Oilfield Services Carry?

You can click the graphic below for the historical numbers, but it shows that Petro-king Oilfield Services had HK$285.2m of debt in June 2021, down from HK$297.7m, one year before. On the flip side, it has HK$20.2m in cash leading to net debt of about HK$265.0m.

A Look At Petro-king Oilfield Services' Liabilities

We can see from the most recent balance sheet that Petro-king Oilfield Services had liabilities of HK$458.6m falling due within a year, and liabilities of HK$38.9m due beyond that. Offsetting these obligations, it had cash of HK$20.2m as well as receivables valued at HK$397.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$79.7m.

Petro-king Oilfield Services has a market capitalization of HK$184.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 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 had a loss before interest and tax, and actually shrunk its revenue by 11%, to HK$377m. That's not what we would hope to see.

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). Its EBIT loss was a whopping HK$49m. 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$33m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 instance, we've identified 2 warning signs for Petro-king Oilfield Services (1 is potentially serious) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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