ACS Actividades de Construcción y Servicios (BME:ACS) Has A Somewhat Strained 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 can see that ACS, Actividades de Construcción y Servicios, S.A. (BME:ACS) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ACS Actividades de Construcción y Servicios

What Is ACS Actividades de Construcción y Servicios's Debt?

As you can see below, ACS Actividades de Construcción y Servicios had €10.4b of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have €10.4b in cash offsetting this, leading to net cash of €55.1m.

How Healthy Is ACS Actividades de Construcción y Servicios' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ACS Actividades de Construcción y Servicios had liabilities of €19.7b due within 12 months and liabilities of €11.5b due beyond that. On the other hand, it had cash of €10.4b and €8.75b worth of receivables due within a year. So its liabilities total €12.0b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €7.73b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, ACS Actividades de Construcción y Servicios would probably need a major re-capitalization if its creditors were to demand repayment. ACS Actividades de Construcción y Servicios boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Shareholders should be aware that ACS Actividades de Construcción y Servicios's EBIT was down 87% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ACS Actividades de Construcción y Servicios 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ACS Actividades de Construcción y Servicios 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. Looking at the most recent three years, ACS Actividades de Construcción y Servicios recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although ACS Actividades de Construcción y Servicios's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €55.1m. However, we do find both ACS Actividades de Construcción y Servicios's EBIT growth rate and its interest cover troubling. So even though it has net cash, we do think the business has some risks worth watching. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for ACS Actividades de Construcción y Servicios you should know about.

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.

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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.