Priner Serviços Industriais (BVMF:PRNR3) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Priner Serviços Industriais S.A. (BVMF:PRNR3) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Priner Serviços Industriais

What Is Priner Serviços Industriais's Debt?

You can click the graphic below for the historical numbers, but it shows that Priner Serviços Industriais had R$47.1m of debt in June 2021, down from R$71.1m, one year before. But it also has R$70.6m in cash to offset that, meaning it has R$23.5m net cash.

How Strong Is Priner Serviços Industriais' Balance Sheet?

We can see from the most recent balance sheet that Priner Serviços Industriais had liabilities of R$91.6m falling due within a year, and liabilities of R$31.8m due beyond that. On the other hand, it had cash of R$70.6m and R$123.6m worth of receivables due within a year. So it actually has R$70.8m more liquid assets than total liabilities.

This excess liquidity suggests that Priner Serviços Industriais is taking a careful approach to debt. 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.

Although Priner Serviços Industriais made a loss at the EBIT level, last year, it was also good to see that it generated R$22m in EBIT over the last twelve months. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Priner Serviços Industriais has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Priner Serviços Industriais saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Priner Serviços Industriais has R$23.5m in net cash and a decent-looking balance sheet. So we don't have any problem with Priner Serviços Industriais's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Priner Serviços Industriais (including 1 which is a bit concerning) .

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.

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.

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