Petra Energy Berhad (KLSE:PENERGY) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Petra Energy Berhad (KLSE:PENERGY) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Petra Energy Berhad

How Much Debt Does Petra Energy Berhad Carry?

As you can see below, at the end of September 2020, Petra Energy Berhad had RM38.6m of debt, up from RM27.0m a year ago. Click the image for more detail. However, it does have RM154.0m in cash offsetting this, leading to net cash of RM115.4m.

How Healthy Is Petra Energy Berhad's Balance Sheet?

According to the last reported balance sheet, Petra Energy Berhad had liabilities of RM249.5m due within 12 months, and liabilities of RM2.25m due beyond 12 months. Offsetting this, it had RM154.0m in cash and RM189.4m in receivables that were due within 12 months. So it actually has RM91.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that Petra Energy Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Petra Energy Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Petra Energy Berhad has boosted its EBIT by 79%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Petra Energy 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Petra Energy 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. Happily for any shareholders, Petra Energy Berhad actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Petra Energy Berhad has RM115.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM31m, being 260% of its EBIT. The bottom line is that we do not find Petra Energy Berhad's debt levels at all concerning. 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. Be aware that Petra Energy Berhad is showing 3 warning signs in our investment analysis , you should know about...

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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This article by Simply Wall St is general in nature. 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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