Is Priner Serviços Industriais (BVMF:PRNR3) Using Too Much 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 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. We can see that Priner Serviços Industriais S.A. (BVMF:PRNR3) does use debt in its business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Priner Serviços Industriais

What Is Priner Serviços Industriais's Net Debt?

The image below, which you can click on for greater detail, shows that Priner Serviços Industriais had debt of R$63.7m at the end of September 2020, a reduction from R$95.4m over a year. However, it does have R$134.6m in cash offsetting this, leading to net cash of R$70.9m.

How Healthy Is Priner Serviços Industriais's Balance Sheet?

We can see from the most recent balance sheet that Priner Serviços Industriais had liabilities of R$68.3m falling due within a year, and liabilities of R$50.5m due beyond that. On the other hand, it had cash of R$134.6m and R$83.8m worth of receivables due within a year. So it can boast R$99.6m 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. Succinctly put, Priner Serviços Industriais boasts net cash, 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 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 25%, to R$262m. To be frank that doesn't bode well.

So How Risky Is Priner Serviços Industriais?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Priner Serviços Industriais lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through R$32m of cash and made a loss of R$21m. Given it only has net cash of R$70.9m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Priner Serviços Industriais (including 1 which is can't be ignored) .

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.

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