We Think Perdana Petroleum Berhad (KLSE:PERDANA) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Perdana Petroleum Berhad (KLSE:PERDANA) makes use of debt. But is this debt a concern to shareholders?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Perdana Petroleum Berhad

What Is Perdana Petroleum Berhad's Debt?

As you can see below, Perdana Petroleum Berhad had RM110.5m of debt at September 2020, down from RM488.3m a year prior. However, it also had RM58.7m in cash, and so its net debt is RM51.9m.

How Strong Is Perdana Petroleum Berhad's Balance Sheet?

According to the last reported balance sheet, Perdana Petroleum Berhad had liabilities of RM122.6m due within 12 months, and liabilities of RM240.0m due beyond 12 months. Offsetting this, it had RM58.7m in cash and RM71.9m in receivables that were due within 12 months. So its liabilities total RM232.1m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM365.5m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Perdana Petroleum Berhad will need earnings to service that debt. 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

Over the last twelve months Perdana Petroleum Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost RM8.6m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 RM50m 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Perdana Petroleum Berhad is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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. 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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