Warren Buffett famously said, '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, EMCOR Group, Inc. (NYSE:EME) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is EMCOR Group's Debt?
You can click the graphic below for the historical numbers, but it shows that EMCOR Group had US$256.1m of debt in September 2019, down from US$299.3m, one year before. However, its balance sheet shows it holds US$368.1m in cash, so it actually has US$112.0m net cash.
How Strong Is EMCOR Group's Balance Sheet?
We can see from the most recent balance sheet that EMCOR Group had liabilities of US$1.79b falling due within a year, and liabilities of US$763.5m due beyond that. On the other hand, it had cash of US$368.1m and US$2.11b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$83.1m.
This state of affairs indicates that EMCOR Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$5.14b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, EMCOR Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
And we also note warmly that EMCOR Group grew its EBIT by 13% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine EMCOR Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While EMCOR Group 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 most recent three years, EMCOR Group recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
We could understand if investors are concerned about EMCOR Group's liabilities, but we can be reassured by the fact it has has net cash of US$112.0m. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in US$331m. So is EMCOR Group's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in EMCOR Group would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
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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