Is PrimeEnergy Resources (NASDAQ:PNRG) Using Too Much Debt?

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.' 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. Importantly, PrimeEnergy Resources Corporation (NASDAQ:PNRG) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for PrimeEnergy Resources

How Much Debt Does PrimeEnergy Resources Carry?

You can click the graphic below for the historical numbers, but it shows that PrimeEnergy Resources had US$41.8m of debt in September 2020, down from US$61.5m, one year before. However, it also had US$4.09m in cash, and so its net debt is US$37.7m.

How Healthy Is PrimeEnergy Resources' Balance Sheet?

The latest balance sheet data shows that PrimeEnergy Resources had liabilities of US$53.7m due within a year, and liabilities of US$52.4m falling due after that. Offsetting these obligations, it had cash of US$4.09m as well as receivables valued at US$5.29m due within 12 months. So it has liabilities totalling US$96.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$113.0m, so it does suggest shareholders should keep an eye on PrimeEnergy Resources' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is PrimeEnergy Resources's earnings that will influence how the balance sheet holds up in the future. 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 PrimeEnergy Resources had a loss before interest and tax, and actually shrunk its revenue by 44%, to US$62m. That makes us nervous, to say the least.

Caveat Emptor

Not only did PrimeEnergy Resources's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$20m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$1.7m into a profit. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for PrimeEnergy Resources 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.

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