Polyard Petroleum International Group (HKG:8011) Is Carrying A Fair Bit Of Debt

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 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 Polyard Petroleum International Group Limited (HKG:8011) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Polyard Petroleum International Group

How Much Debt Does Polyard Petroleum International Group Carry?

The image below, which you can click on for greater detail, shows that Polyard Petroleum International Group had debt of HK$152.0m at the end of June 2020, a reduction from HK$231.0m over a year. 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$235.7m due within a year, and liabilities of HK$71.9m falling due after that. Offsetting these obligations, it had cash of HK$1.90m as well as receivables valued at HK$42.4m due within 12 months. So its liabilities total HK$263.3m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Polyard Petroleum International Group has a market capitalization of HK$496.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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

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). Indeed, it lost HK$15m at the EBIT level. 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. Another cause for caution is that is bled HK$8.0m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Polyard Petroleum International Group you should be aware of, and 2 of them shouldn't be ignored.

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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