Health Check: How Prudently Does Priner Serviços Industriais (BVMF:PRNR3) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Priner Serviços Industriais S.A. (BVMF:PRNR3) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Priner Serviços Industriais

How Much Debt Does Priner Serviços Industriais Carry?

You can click the graphic below for the historical numbers, but it shows that Priner Serviços Industriais had R$56.1m of debt in December 2020, down from R$87.4m, one year before. But on the other hand it also has R$109.8m in cash, leading to a R$53.7m net cash position.

A Look At Priner Serviços Industriais' Liabilities

Zooming in on the latest balance sheet data, we can see that Priner Serviços Industriais had liabilities of R$66.6m due within 12 months and liabilities of R$44.4m due beyond that. Offsetting this, it had R$109.8m in cash and R$87.1m in receivables that were due within 12 months. So it can boast R$85.9m 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. Because it has plenty of assets, it is unlikely to have trouble 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Priner Serviços Industriais will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Priner Serviços Industriais had a loss before interest and tax, and actually shrunk its revenue by 30%, to R$242m. That makes us nervous, to say the least.

So How Risky Is Priner Serviços Industriais?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Priner Serviços Industriais lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of R$41m and booked a R$2.1m accounting loss. Given it only has net cash of R$53.7m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Priner Serviços Industriais is showing 4 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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. 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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