Stock Analysis

These 4 Measures Indicate That Primoris Services (NASDAQ:PRIM) Is Using Debt Extensively

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NasdaqGS:PRIM
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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.' 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. As with many other companies Primoris Services Corporation (NASDAQ:PRIM) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

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How Much Debt Does Primoris Services Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Primoris Services had debt of US$701.3m, up from US$661.7m in one year. However, because it has a cash reserve of US$91.3m, its net debt is less, at about US$610.0m.

debt-equity-history-analysis
NasdaqGS:PRIM Debt to Equity History September 1st 2022

How Healthy Is Primoris Services' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Primoris Services had liabilities of US$889.3m due within 12 months and liabilities of US$791.7m due beyond that. On the other hand, it had cash of US$91.3m and US$1.06b worth of receivables due within a year. So it has liabilities totalling US$528.1m more than its cash and near-term receivables, combined.

Primoris Services has a market capitalization of US$1.08b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Primoris Services has net debt to EBITDA of 2.6 suggesting it uses a fair bit of leverage to boost returns. But the high interest coverage of 8.3 suggests it can easily service that debt. Importantly, Primoris Services's EBIT fell a jaw-dropping 30% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Primoris Services can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, Primoris Services recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Mulling over Primoris Services's attempt at (not) growing its EBIT, we're certainly not enthusiastic. But on the bright side, its interest cover is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that Primoris Services's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Primoris Services (1 is concerning!) that you should be aware of before investing here.

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.

What are the risks and opportunities for Primoris Services?

Primoris Services Corporation, a specialty contractor company, provides a range of construction, fabrication, maintenance, replacement, and engineering services in the United States and Canada.

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Rewards

  • Price-To-Earnings ratio (11.5x) is below the US market (15.5x)

  • Earnings are forecast to grow 12.8% per year

  • Earnings have grown 14.3% per year over the past 5 years

Risks

  • Debt is not well covered by operating cash flow

  • Significant insider selling over the past 3 months

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