Does Priner Serviços Industriais (BVMF:PRNR3) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Priner Serviços Industriais S.A. (BVMF:PRNR3) does carry debt. But the real question is whether this debt is making the company risky.

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Priner Serviços Industriais

What Is Priner Serviços Industriais's Debt?

The image below, which you can click on for greater detail, shows that Priner Serviços Industriais had debt of R$41.2m at the end of September 2021, a reduction from R$63.7m over a year. But on the other hand it also has R$71.1m in cash, leading to a R$29.9m net cash position.

How Strong Is Priner Serviços Industriais' Balance Sheet?

According to the last reported balance sheet, Priner Serviços Industriais had liabilities of R$104.3m due within 12 months, and liabilities of R$23.7m due beyond 12 months. Offsetting these obligations, it had cash of R$71.1m as well as receivables valued at R$122.1m due within 12 months. So it actually has R$65.2m more liquid assets than total liabilities.

It's good to see that Priner Serviços Industriais has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Priner Serviços Industriais has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Priner Serviços Industriais made a loss at the EBIT level, last year, it was also good to see that it generated R$32m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Priner Serviços Industriais's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Priner Serviços Industriais 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 year, Priner Serviços Industriais saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Priner Serviços Industriais has R$29.9m in net cash and a decent-looking balance sheet. So we don't have any problem with Priner Serviços Industriais's use of debt. 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. For instance, we've identified 2 warning signs for Priner Serviços Industriais (1 can't be ignored) you should be aware of.

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. 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.