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We Think Granite Construction (NYSE:GVA) Can Stay On Top Of Its Debt

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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. 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.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Granite Construction

What Is Granite Construction's Debt?

The image below, which you can click on for greater detail, shows that Granite Construction had debt of US$327.9m at the end of March 2021, a reduction from US$373.1m over a year. But on the other hand it also has US$639.5m in cash, leading to a US$311.6m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Granite Construction's Balance Sheet?

According to the last reported balance sheet, Granite Construction had liabilities of US$1.00b due within 12 months, and liabilities of US$442.4m due beyond 12 months. Offsetting these obligations, it had cash of US$639.5m as well as receivables valued at US$660.4m due within 12 months. So its liabilities total US$142.6m more than the combination of its cash and short-term receivables.

Since publicly traded Granite Construction shares are worth a total of US$1.89b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Granite Construction boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Granite Construction improved its EBIT from a last year's loss to a positive US$62m. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Granite Construction 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, Granite Construction actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Granite Construction's liabilities, but we can be reassured by the fact it has has net cash of US$311.6m. The cherry on top was that in converted 381% of that EBIT to free cash flow, bringing in US$236m. So we don't have any problem with Granite Construction's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Granite Construction you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.