Does Polyard Petroleum International Group (HKG:8011) Have A Healthy Balance Sheet?

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 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 can see that Polyard Petroleum International Group Limited (HKG:8011) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Polyard Petroleum International Group

What Is Polyard Petroleum International Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Polyard Petroleum International Group had HK$77.9m of debt in June 2021, down from HK$152.0m, one year before. Net debt is about the same, since the it doesn't have much cash.

A Look At Polyard Petroleum International Group's Liabilities

The latest balance sheet data shows that Polyard Petroleum International Group had liabilities of HK$176.0m due within a year, and liabilities of HK$33.5m falling due after that. Offsetting these obligations, it had cash of HK$1.16m as well as receivables valued at HK$51.7m due within 12 months. So it has liabilities totalling HK$156.6m more than its cash and near-term receivables, combined.

Polyard Petroleum International Group has a market capitalization of HK$268.6m, 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 it is Polyard Petroleum International Group'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.

Since Polyard Petroleum International Group doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.

Caveat Emptor

Over the last twelve months Polyard Petroleum International Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$12m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$51m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Polyard Petroleum International Group has 5 warning signs (and 2 which make us uncomfortable) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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