Health Check: How Prudently Does Perdana Petroleum Berhad (KLSE:PERDANA) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Perdana Petroleum Berhad (KLSE:PERDANA) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Perdana Petroleum Berhad

What Is Perdana Petroleum Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Perdana Petroleum Berhad had RM72.8m of debt in September 2021, down from RM110.5m, one year before. However, because it has a cash reserve of RM14.2m, its net debt is less, at about RM58.6m.

A Look At Perdana Petroleum Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Perdana Petroleum Berhad had liabilities of RM117.6m due within 12 months and liabilities of RM183.0m due beyond that. On the other hand, it had cash of RM14.2m and RM79.8m worth of receivables due within a year. So it has liabilities totalling RM206.6m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM243.8m, so it does suggest shareholders should keep an eye on Perdana Petroleum Berhad's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Perdana Petroleum 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.

In the last year Perdana Petroleum Berhad had a loss before interest and tax, and actually shrunk its revenue by 38%, to RM146m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Perdana Petroleum Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM39m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM82m. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Perdana Petroleum Berhad , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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