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

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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Perdana Petroleum Berhad

What Is Perdana Petroleum Berhad's Net Debt?

As you can see below, Perdana Petroleum Berhad had RM58.4m of debt at September 2022, down from RM72.8m a year prior. However, because it has a cash reserve of RM11.9m, its net debt is less, at about RM46.6m.

A Look At Perdana Petroleum Berhad's Liabilities

The latest balance sheet data shows that Perdana Petroleum Berhad had liabilities of RM89.3m due within a year, and liabilities of RM180.0m falling due after that. Offsetting these obligations, it had cash of RM11.9m as well as receivables valued at RM85.8m due within 12 months. So its liabilities total RM171.6m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Perdana Petroleum Berhad is worth RM377.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to RM185m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Perdana Petroleum Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM61m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM274m into a profit. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Perdana Petroleum Berhad (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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. 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.