Is Borneo Oil Berhad (KLSE:BORNOIL) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Borneo Oil Berhad (KLSE:BORNOIL) does carry debt. 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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Borneo Oil Berhad

What Is Borneo Oil Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Borneo Oil Berhad had RM16.8m of debt, an increase on RM14.0m, over one year. However, its balance sheet shows it holds RM26.9m in cash, so it actually has RM10.1m net cash.

How Healthy Is Borneo Oil Berhad's Balance Sheet?

The latest balance sheet data shows that Borneo Oil Berhad had liabilities of RM18.1m due within a year, and liabilities of RM39.1m falling due after that. On the other hand, it had cash of RM26.9m and RM36.8m worth of receivables due within a year. So it actually has RM6.59m more liquid assets than total liabilities.

This surplus suggests that Borneo Oil Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Borneo Oil Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Borneo Oil Berhad turned things around in the last 12 months, delivering and EBIT of RM38m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Borneo Oil Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Borneo Oil Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Borneo Oil Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Borneo Oil Berhad has RM10.1m in net cash and a decent-looking balance sheet. So we don't have any problem with Borneo Oil Berhad's use of debt. 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 example, we've discovered 3 warning signs for Borneo Oil Berhad (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.