Is Perdana Petroleum Berhad (KLSE:PERDANA) A Risky Investment?

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

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Perdana Petroleum Berhad

What Is Perdana Petroleum Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Perdana Petroleum Berhad had RM63.2m of debt in March 2022, down from RM233.8m, one year before. However, because it has a cash reserve of RM19.8m, its net debt is less, at about RM43.5m.

A Look At Perdana Petroleum Berhad's Liabilities

According to the last reported balance sheet, Perdana Petroleum Berhad had liabilities of RM82.8m due within 12 months, and liabilities of RM200.5m due beyond 12 months. Offsetting this, it had RM19.8m in cash and RM44.1m in receivables that were due within 12 months. So it has liabilities totalling RM219.5m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's RM199.5m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Perdana Petroleum Berhad's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Perdana Petroleum Berhad had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM92m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of RM315m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Perdana Petroleum Berhad has 2 warning signs (and 1 which is concerning) we think you should know about.

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.