We Think PORR (VIE:POS) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that PORR AG (VIE:POS) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is PORR's Net Debt?

As you can see below, PORR had €205.9m of debt at December 2024, down from €218.0m a year prior. However, its balance sheet shows it holds €637.0m in cash, so it actually has €431.1m net cash.

A Look At PORR's Liabilities

Zooming in on the latest balance sheet data, we can see that PORR had liabilities of €2.66b due within 12 months and liabilities of €686.4m due beyond that. On the other hand, it had cash of €637.0m and €1.65b worth of receivables due within a year. So it has liabilities totalling €1.06b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €974.1m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. PORR 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.

View our latest analysis for PORR

It was also good to see that despite losing money on the EBIT line last year, PORR turned things around in the last 12 months, delivering and EBIT of €91m. 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 PORR'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 .

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. PORR 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. Over the last year, PORR actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although PORR's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €431.1m. The cherry on top was that in converted 147% of that EBIT to free cash flow, bringing in €134m. So we don't have any problem with PORR's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for PORR that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.