Prime People (LON:PRP) Has Debt But No Earnings; Should You Worry?

Simply Wall St
July 25, 2021
Source: Shutterstock

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Prime People Plc (LON:PRP) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Prime People

What Is Prime People's Net Debt?

As you can see below, at the end of March 2021, Prime People had UK£1.73m of debt, up from none a year ago. Click the image for more detail. But it also has UK£3.98m in cash to offset that, meaning it has UK£2.25m net cash.

AIM:PRP Debt to Equity History July 25th 2021

How Strong Is Prime People's Balance Sheet?

According to the last reported balance sheet, Prime People had liabilities of UK£3.79m due within 12 months, and liabilities of UK£2.25m due beyond 12 months. Offsetting this, it had UK£3.98m in cash and UK£3.06m in receivables that were due within 12 months. So it actually has UK£998.0k more liquid assets than total liabilities.

This short term liquidity is a sign that Prime People could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Prime People 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 Prime People 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.

In the last year Prime People had a loss before interest and tax, and actually shrunk its revenue by 26%, to UK£18m. That makes us nervous, to say the least.

So How Risky Is Prime People?

Although Prime People had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£1.8m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Case in point: We've spotted 3 warning signs for Prime People you should be aware of, and 1 of them is 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.

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