We Think Petron Malaysia Refining & Marketing Bhd (KLSE:PETRONM) Has A Fair Chunk 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.' 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. Importantly, Petron Malaysia Refining & Marketing Bhd (KLSE:PETRONM) does carry debt. But should shareholders be worried about its use of debt?

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. 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 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

How Much Debt Does Petron Malaysia Refining & Marketing Bhd Carry?

As you can see below, at the end of September 2020, Petron Malaysia Refining & Marketing Bhd had RM370.0m of debt, up from none a year ago. Click the image for more detail. However, because it has a cash reserve of RM193.3m, its net debt is less, at about RM176.7m.

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

Zooming in on the latest balance sheet data, we can see that Petron Malaysia Refining & Marketing Bhd had liabilities of RM1.09b due within 12 months and liabilities of RM139.1m due beyond that. On the other hand, it had cash of RM193.3m and RM174.0m worth of receivables due within a year. So it has liabilities totalling RM865.0m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of RM1.34b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Petron Malaysia Refining & Marketing Bhd's earnings that will influence how the balance sheet holds up in the future. 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 RM7.9b, which is a fall of 31%. That makes us nervous, to say the least.

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). To be specific the EBIT loss came in at RM64m. 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. Another cause for caution is that is bled RM479m in negative free cash flow over the last twelve months. So suffice it to say 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. For instance, we've identified 3 warning signs for Petron Malaysia Refining & Marketing Bhd (1 is a bit concerning) you should be aware of.

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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