The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Koninklijke BAM Groep nv (AMS:BAMNB) does carry debt. But is this debt a concern to shareholders?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
What Is Koninklijke BAM Groep's Debt?
As you can see below, Koninklijke BAM Groep had €287.3m of debt at June 2019, down from €345.8m a year prior. But on the other hand it also has €448.6m in cash, leading to a €161.3m net cash position.
How Strong Is Koninklijke BAM Groep's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Koninklijke BAM Groep had liabilities of €3.10b due within 12 months and liabilities of €784.8m due beyond that. On the other hand, it had cash of €448.6m and €1.93b worth of receivables due within a year. So it has liabilities totalling €1.50b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the €730.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Koninklijke BAM Groep would likely require a major re-capitalisation if it had to pay its creditors today. Koninklijke BAM Groep boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
Although Koninklijke BAM Groep made a loss at the EBIT level, last year, it was also good to see that it generated €39m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Koninklijke BAM Groep'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, a company can only pay off debt with cold hard cash, not accounting profits. Koninklijke BAM Groep may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Koninklijke BAM Groep actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Although Koninklijke BAM Groep's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €161m. And it impressed us with free cash flow of €160m, being 414% of its EBIT. So although we see some areas for improvement, we're not too worried about Koninklijke BAM Groep's balance sheet. While Koninklijke BAM Groep didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away.Click here to see if its earnings are heading in the right direction, over the medium term.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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