PetroNor E&P (OB:PNOR) Has A Pretty Healthy Balance Sheet

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. We note that PetroNor E&P ASA (OB:PNOR) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for PetroNor E&P

What Is PetroNor E&P's Debt?

The image below, which you can click on for greater detail, shows that PetroNor E&P had debt of US$5.50m at the end of December 2023, a reduction from US$11.0m over a year. But it also has US$46.2m in cash to offset that, meaning it has US$40.7m net cash.

How Healthy Is PetroNor E&P's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PetroNor E&P had liabilities of US$25.6m due within 12 months and liabilities of US$27.2m due beyond that. Offsetting these obligations, it had cash of US$46.2m as well as receivables valued at US$31.1m due within 12 months. So it actually has US$24.6m more liquid assets than total liabilities.

This excess liquidity suggests that PetroNor E&P is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that PetroNor E&P has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, PetroNor E&P grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since PetroNor E&P 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. PetroNor E&P 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. Over the last three years, PetroNor E&P reported free cash flow worth 2.5% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that PetroNor E&P has net cash of US$40.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 21% year-on-year EBIT growth. So is PetroNor E&P's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with PetroNor E&P .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.