These 4 Measures Indicate That PETRONAS Dagangan Berhad (KLSE:PETDAG) Is Using Debt Safely

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 can see that PETRONAS Dagangan Berhad (KLSE:PETDAG) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for PETRONAS Dagangan Berhad

How Much Debt Does PETRONAS Dagangan Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that PETRONAS Dagangan Berhad had RM16.0m of debt in December 2021, down from RM20.8m, one year before. But on the other hand it also has RM1.91b in cash, leading to a RM1.90b net cash position.

A Look At PETRONAS Dagangan Berhad's Liabilities

According to the last reported balance sheet, PETRONAS Dagangan Berhad had liabilities of RM3.76b due within 12 months, and liabilities of RM226.2m due beyond 12 months. On the other hand, it had cash of RM1.91b and RM3.49b worth of receivables due within a year. So it actually has RM1.41b more liquid assets than total liabilities.

This short term liquidity is a sign that PETRONAS Dagangan Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that PETRONAS Dagangan Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, PETRONAS Dagangan Berhad grew its EBIT by 87% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine PETRONAS Dagangan Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. PETRONAS Dagangan Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, PETRONAS Dagangan Berhad recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that PETRONAS Dagangan Berhad has net cash of RM1.90b, as well as more liquid assets than liabilities. And we liked the look of last year's 87% year-on-year EBIT growth. So we don't think PETRONAS Dagangan Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with PETRONAS Dagangan Berhad .

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.

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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.