Is Bilfinger (ETR:GBF) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Bilfinger

What Is Bilfinger's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Bilfinger had €431.1m of debt, an increase on €255.8m, over one year. But on the other hand it also has €580.4m in cash, leading to a €149.3m net cash position.

How Strong Is Bilfinger's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bilfinger had liabilities of €1.54b due within 12 months and liabilities of €593.1m due beyond that. On the other hand, it had cash of €580.4m and €1.19b worth of receivables due within a year. So its liabilities total €369.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Bilfinger has a market capitalization of €1.28b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Bilfinger also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Bilfinger has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Bilfinger 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. Looking at the most recent three years, Bilfinger recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 €149.3m. And it impressed us with its EBIT growth of 38% over the last year. So we are not troubled with Bilfinger's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Bilfinger has 3 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.