Here's Why Bilfinger (ETR:GBF) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Bilfinger SE (ETR:GBF) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Bilfinger

How Much Debt Does Bilfinger Carry?

The chart below, which you can click on for greater detail, shows that Bilfinger had €375.3m in debt in December 2020; about the same as the year before. But on the other hand it also has €989.4m in cash, leading to a €614.1m net cash position.

How Strong Is Bilfinger's Balance Sheet?

According to the last reported balance sheet, Bilfinger had liabilities of €1.17b due within 12 months, and liabilities of €886.4m due beyond 12 months. Offsetting these obligations, it had cash of €989.4m as well as receivables valued at €863.2m due within 12 months. So its liabilities total €205.1m more than the combination of its cash and short-term receivables.

Of course, Bilfinger has a market capitalization of €1.29b, 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. Despite its noteworthy liabilities, Bilfinger boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Bilfinger's saving grace is its low debt levels, because its EBIT has tanked 66% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Bilfinger'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Bilfinger 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. In the last three years, Bilfinger's free cash flow amounted to 48% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although Bilfinger's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €614.1m. So we are not troubled with Bilfinger's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Bilfinger has 3 warning signs we think 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.

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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.
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