Petron Malaysia Refining & Marketing Bhd (KLSE:PETRONM) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Petron Malaysia Refining & Marketing Bhd (KLSE:PETRONM) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Petron Malaysia Refining & Marketing Bhd

What Is Petron Malaysia Refining & Marketing Bhd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Petron Malaysia Refining & Marketing Bhd had RM420.3m of debt, an increase on RM130.0m, over one year. However, because it has a cash reserve of RM146.9m, its net debt is less, at about RM273.4m.

A Look At Petron Malaysia Refining & Marketing Bhd's Liabilities

We can see from the most recent balance sheet that Petron Malaysia Refining & Marketing Bhd had liabilities of RM1.07b falling due within a year, and liabilities of RM162.4m due beyond that. On the other hand, it had cash of RM146.9m and RM232.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM857.0m.

This deficit is considerable relative to its market capitalization of RM1.27b, so it does suggest shareholders should keep an eye on Petron Malaysia Refining & Marketing Bhd's use of debt. 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 Petron Malaysia Refining & Marketing Bhd will need earnings to service that debt. 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.

Over 12 months, Petron Malaysia Refining & Marketing Bhd made a loss at the EBIT level, and saw its revenue drop to RM6.5b, which is a fall of 44%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Petron Malaysia Refining & Marketing Bhd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RM20m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM234m of cash over the last year. So in short it's a really risky stock. 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. For example Petron Malaysia Refining & Marketing Bhd has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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. 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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