Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We can see that Bilfinger SE (ETR: GBF) uses debt in its business. But the most important question is: what risk does this debt create?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both liquidity and debt levels.
See our latest review for Bilfinger
What is Bilfinger’s debt?
You can click on the graph below for the historical figures, but it shows that Bilfinger had € 328.3 million in debt in March 2021, up from € 375.7 million a year earlier. But he also has € 920.2million in cash to make up for that, which means he has € 591.9million in net cash.
Is Bilfinger’s track record healthy?
According to the latest published balance sheet, Bilfinger had liabilities of 1.17 billion euros at 12 months and liabilities of 866.7 million euros over 12 months. In compensation for these obligations, he had cash of € 920.2 million as well as receivables valued at € 926.5 million within 12 months. It therefore has a total liability of € 191.2 million more than its combined cash and short-term receivables.
This deficit is not that serious as Bilfinger is worth € 935.0m, and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution. While he has some liabilities to note, Bilfinger also has more cash than debt, so we’re pretty confident he can handle his debt safely.
And we also warmly note that Bilfinger increased its EBIT by 20% last year, which makes its debt more manageable. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Bilfinger’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. Bilfinger may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its business. ability to manage debt. Over the past three years, Bilfinger has recorded free cash flow of 71% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Although Bilfinger has more liabilities than liquid assets, it also has a net cash position of 591.9 million euros. The icing on the cake is that it converted 71% of this EBIT into free cash flow, bringing in 142 million euros. So is Bilfinger’s debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 3 warning signs for Bilfinger which you should know before investing here.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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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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