Is Strabag (VIE:STR) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Strabag SE (VIE:STR) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Strabag

What Is Strabag's Debt?

You can click the graphic below for the historical numbers, but it shows that Strabag had €966.6m of debt in June 2023, down from €1.06b, one year before. But it also has €2.27b in cash to offset that, meaning it has €1.30b net cash.

A Look At Strabag's Liabilities

Zooming in on the latest balance sheet data, we can see that Strabag had liabilities of €6.54b due within 12 months and liabilities of €2.18b due beyond that. On the other hand, it had cash of €2.27b and €3.55b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.91b.

This deficit is considerable relative to its market capitalization of €3.73b, so it does suggest shareholders should keep an eye on Strabag's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Strabag also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Strabag if management cannot prevent a repeat of the 24% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Strabag can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Strabag has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Strabag actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Strabag does have more liabilities than liquid assets, it also has net cash of €1.30b. And it impressed us with free cash flow of €995m, being 123% of its EBIT. So we don't have any problem with Strabag's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Strabag that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.