Sino Oil and Gas Holdings (HKG:702) Has Debt But No Earnings; Should You Worry?

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 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 note that Sino Oil and Gas Holdings Limited (HKG:702) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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 Sino Oil and Gas Holdings

How Much Debt Does Sino Oil and Gas Holdings Carry?

The chart below, which you can click on for greater detail, shows that Sino Oil and Gas Holdings had HK$2.19b in debt in June 2022; about the same as the year before. On the flip side, it has HK$60.2m in cash leading to net debt of about HK$2.13b.

How Healthy Is Sino Oil and Gas Holdings' Balance Sheet?

The latest balance sheet data shows that Sino Oil and Gas Holdings had liabilities of HK$2.45b due within a year, and liabilities of HK$805.1m falling due after that. Offsetting this, it had HK$60.2m in cash and HK$106.5m in receivables that were due within 12 months. So its liabilities total HK$3.09b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$260.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Sino Oil and Gas Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sino Oil and Gas Holdings 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 Sino Oil and Gas Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 57%, to HK$524m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Sino Oil and Gas Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping HK$196m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it burned through HK$25m in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. 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 Sino Oil and Gas Holdings has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.