Petra Energy Berhad (KLSE:PENERGY) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Petra Energy Berhad (KLSE:PENERGY) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

Check out our latest analysis for Petra Energy Berhad

What Is Petra Energy Berhad's Debt?

As you can see below, Petra Energy Berhad had RM20.7m of debt at March 2022, down from RM30.8m a year prior. However, it does have RM144.8m in cash offsetting this, leading to net cash of RM124.1m.

How Healthy Is Petra Energy Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Petra Energy Berhad had liabilities of RM135.5m due within 12 months and liabilities of RM2.06m due beyond that. Offsetting this, it had RM144.8m in cash and RM128.3m in receivables that were due within 12 months. So it can boast RM135.5m 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. Simply put, the fact that Petra Energy Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Petra Energy Berhad's load is not too heavy, because its EBIT was down 70% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Petra Energy Berhad 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Petra Energy Berhad has net cash of RM124.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 326% of that EBIT to free cash flow, bringing in RM5.3m. So we don't think Petra Energy Berhad's use of debt is 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. For instance, we've identified 4 warning signs for Petra Energy Berhad (1 is significant) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.