Does Petra Energy Berhad (KLSE: PENERGY) have a healthy balance sheet?

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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that Petra Energy Berhad (KLSE: PENERGY) has debt on its balance sheet. But the most important question is: what risk does this debt create?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

See our latest analysis for Petra Energy Berhad

What is Petra Energy Berhad’s net debt?

As you can see below, at the end of June 2021, Petra Energy Berhad had a debt of RM 23.6 million, up from RM 18.5 million a year ago. Click on the image for more details. However, he has RM167.1million in cash offsetting this, which leads to a net cash position of RM143.4million.

KLSE: PENERGY History of debt to equity September 29, 2021

A look at the liabilities of Petra Energy Berhad

According to the latest published balance sheet, Petra Energy Berhad had liabilities of RM 210.3 million due within 12 months and liabilities of RM 1.30 million due beyond 12 months. In compensation for these obligations, he had cash of Ringgit 167.1 million as well as receivables valued at Ringgit 149.5 million due within 12 months. Thus, he can boast of having 104.9 million RM more in liquid assets than total Liabilities.

This excess cash suggests that Petra Energy Berhad’s balance sheet could take a hit, just as Homer Simpson’s head can take a hit. Given this fact, we believe its track record is as strong as an ox. Put simply, the fact that Petra Energy Berhad has more cash than debt is arguably a good indication that it can safely manage its debt.

Best of all, Petra Energy Berhad increased its EBIT by 1,014% last year, which is an impressive improvement. This boost will make it even easier to pay down debt in the future. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is the profits of Petra Energy Berhad that will influence the performance of the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. Although Petra Energy Berhad has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building. (or erode) that cash balance. Over the past three years, Petra Energy Berhad has actually generated more free cash flow than EBIT. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.

In summary

While we sympathize with investors who find debt of concern, you should keep in mind that Petra Energy Berhad has net cash of RM 143.4 million, as well as more liquid assets than liabilities. And he impressed us with free cash flow of RM55 million, or 365% of his EBIT. Ultimately, we are not concerned about Petra Energy Berhad’s debt. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 2 warning signs for Petra Energy Berhad you must be aware.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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