AS Merko Ehitus (TAL:MRK1T) Has A Rock Solid Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that AS Merko Ehitus (TAL:MRK1T) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for AS Merko Ehitus

What Is AS Merko Ehitus's Net Debt?

As you can see below, AS Merko Ehitus had €33.4m of debt at December 2024, down from €50.4m a year prior. However, its balance sheet shows it holds €101.9m in cash, so it actually has €68.5m net cash.

How Strong Is AS Merko Ehitus' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AS Merko Ehitus had liabilities of €165.9m due within 12 months and liabilities of €27.0m due beyond that. Offsetting these obligations, it had cash of €101.9m as well as receivables valued at €51.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €39.5m.

Given AS Merko Ehitus has a market capitalization of €449.6m, it's hard to believe these liabilities pose much threat. 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, AS Merko Ehitus boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, AS Merko Ehitus grew its EBIT by 75% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since AS Merko Ehitus will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While AS Merko Ehitus 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. During the last three years, AS Merko Ehitus generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that AS Merko Ehitus has €68.5m in net cash. And it impressed us with free cash flow of €56m, being 86% of its EBIT. So we don't think AS Merko Ehitus's use of debt is risky. 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 instance, we've identified 1 warning sign for AS Merko Ehitus that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.