Is Polyard Petroleum International Group (HKG:8011) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Polyard Petroleum International Group Limited (HKG:8011) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Polyard Petroleum International Group

What Is Polyard Petroleum International Group's Debt?

As you can see below, Polyard Petroleum International Group had HK$162.5m of debt at December 2020, down from HK$231.0m a year prior. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Polyard Petroleum International Group's Balance Sheet?

According to the last reported balance sheet, Polyard Petroleum International Group had liabilities of HK$152.3m due within 12 months, and liabilities of HK$73.1m due beyond 12 months. Offsetting these obligations, it had cash of HK$1.82m as well as receivables valued at HK$43.2m due within 12 months. So its liabilities total HK$180.3m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Polyard Petroleum International Group is worth HK$337.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Polyard Petroleum International Group 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.

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

Not only did Polyard Petroleum International Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$13m. 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. For example, we would not want to see a repeat of last year's loss of HK$5.1m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Polyard Petroleum International Group (1 is a bit concerning) you should be aware of.

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.

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