Primoris Services (NASDAQ: PRIM) Seems to Use Debt Quite Wisely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, Primoris service company (NASDAQ: PRIM) bears the debt. But does this debt concern shareholders?

What risk does debt entail?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Check out our latest review for Primoris Services

What is the debt of Primoris Services?

As you can see below, Primoris Services had a debt of US $ 325.8 million in December 2020, up from US $ 357.7 million the previous year. However, his balance sheet shows that he has $ 326.7 million in cash, so he actually has $ 982.0,000 in net cash.

debt-equity-historical-analysis

How strong is Primoris Services’ balance sheet?

We can see from the most recent balance sheet that Primoris Services had liabilities of US $ 764.4 million due within one year and liabilities of US $ 490.4 million due beyond. . In compensation for these obligations, he had cash of US $ 326.7 million as well as receivables valued at US $ 740.5 million due within 12 months. Its liabilities therefore total $ 187.5 million more than the combination of its cash and short-term receivables.

Given that Primoris Services has a market capitalization of US $ 1.79 billion, it is hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. While it has some liabilities to note, Primoris Services also has more cash than debt, so we’re pretty confident it can handle its debt safely.

And we are also pleased to note that Primoris Services increased its EBIT by 19% last year, making it easier to manage its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Primoris Services’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.

Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. Although Primoris Services has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building ( or erodes) this cash balance. Over the past three years, Primoris Services has generated strong free cash flow equivalent to 64% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.

In summary

Although Primoris Services’ balance sheet is not particularly strong, due to total liabilities it is clearly positive to see that it has net cash of US $ 982.0k. And we liked the appearance of the 19% year-over-year EBIT growth from last year. So is Primoris Services’ debt a risk? It does not seem to us. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 2 warning signs for Primoris Services you must be aware.

Of course, if you are the kind of investor who prefers to buy stocks without going into debt, then feel free to find out. our exclusive list of cash net growth stocks, today.

This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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