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Is Petrolympic (CVE:PCQ) Using Too Much Debt?

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. As with many other companies Petrolympic Ltd. (CVE:PCQ) makes use of debt. But is this debt a concern to shareholders?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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View our latest analysis for Petrolympic

What Is Petrolympic's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2019 Petrolympic had debt of CA$54.7k, up from CA$15.5k in one year. However, because it has a cash reserve of CA$36.4k, its net debt is less, at about CA$18.3k.

TSXV:PCQ Historical Debt, July 26th 2019
TSXV:PCQ Historical Debt, July 26th 2019

How Strong Is Petrolympic's Balance Sheet?

According to the balance sheet data, Petrolympic had liabilities of CA$544.0k due within 12 months, but no longer term liabilities. On the other hand, it had cash of CA$36.4k and CA$1.4k worth of receivables due within a year. So its liabilities total CA$506.1k more than the combination of its cash and short-term receivables.

Since publicly traded Petrolympic shares are worth a total of CA$5.52m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Petrolympic has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Petrolympic'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.

Since Petrolympic doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.

Caveat Emptor

Over the last twelve months Petrolympic produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$1.1m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$322k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Petrolympic's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.