Does Barakah Offshore Petroleum Berhad (KLSE:BARAKAH) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Barakah Offshore Petroleum Berhad (KLSE:BARAKAH) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Barakah Offshore Petroleum Berhad

What Is Barakah Offshore Petroleum Berhad's Debt?

As you can see below, at the end of December 2022, Barakah Offshore Petroleum Berhad had RM48.7m of debt, up from RM46.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM54.4m in cash, so it actually has RM5.66m net cash.

How Healthy Is Barakah Offshore Petroleum Berhad's Balance Sheet?

The latest balance sheet data shows that Barakah Offshore Petroleum Berhad had liabilities of RM134.6m due within a year, and liabilities of RM50.3m falling due after that. Offsetting these obligations, it had cash of RM54.4m as well as receivables valued at RM57.9m due within 12 months. So it has liabilities totalling RM72.6m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of RM50.1m, we think shareholders really should watch Barakah Offshore Petroleum Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Barakah Offshore Petroleum Berhad has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

In addition to that, we're happy to report that Barakah Offshore Petroleum Berhad has boosted its EBIT by 70%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Barakah Offshore Petroleum Berhad'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Barakah Offshore Petroleum Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Barakah Offshore Petroleum Berhad barely recorded positive free cash flow, in total. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

While Barakah Offshore Petroleum Berhad does have more liabilities than liquid assets, it also has net cash of RM5.66m. And it impressed us with its EBIT growth of 70% over the last year. So although we see some areas for improvement, we're not too worried about Barakah Offshore Petroleum Berhad's balance sheet. 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 3 warning signs for Barakah Offshore Petroleum Berhad (1 is concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.