Does Aecon Group (TSE:ARE) Have A Healthy Balance Sheet?

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.' 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. We note that Aecon Group Inc. (TSE:ARE) does have debt on its balance sheet. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Aecon Group

What Is Aecon Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Aecon Group had debt of CA$350.6m, up from CA$237.3m in one year. However, its balance sheet shows it holds CA$506.1m in cash, so it actually has CA$155.5m net cash.

How Healthy Is Aecon Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aecon Group had liabilities of CA$2.05b due within 12 months and liabilities of CA$321.4m due beyond that. On the other hand, it had cash of CA$506.1m and CA$1.82b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Of course, Aecon Group has a market capitalization of CA$1.59b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Aecon Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that Aecon Group improved its EBIT from a last year's loss to a positive CA$22m. 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 Aecon Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Aecon Group 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. Over the last year, Aecon Group 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

We could understand if investors are concerned about Aecon Group's liabilities, but we can be reassured by the fact it has has net cash of CA$155.5m. The cherry on top was that in converted 438% of that EBIT to free cash flow, bringing in CA$96m. So we don't have any problem with Aecon Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Aecon Group has 2 warning signs we think you should be aware of.

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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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.