Warren Buffett famously said, '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 Granite Construction Incorporated (NYSE:GVA) makes use of debt. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Granite Construction's Debt?
As you can see below, Granite Construction had US$408.7m of debt at September 2019, down from US$433.7m a year prior. However, it does have US$432.4m in cash offsetting this, leading to net cash of US$23.7m.
How Strong Is Granite Construction's Balance Sheet?
According to the last reported balance sheet, Granite Construction had liabilities of US$855.8m due within 12 months, and liabilities of US$514.7m due beyond 12 months. Offsetting this, it had US$432.4m in cash and US$934.3m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to Granite Construction's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.23b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Granite Construction also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Granite Construction'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.
In the last year Granite Construction wasn't profitable at an EBIT level, but managed to grow its revenue by5.0%, to US$3.4b. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Granite Construction?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Granite Construction lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$63m and booked a US$105m accounting loss. Given it only has net cash of US$23.7m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Granite Construction insider transactions.
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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