Does Técnicas Reunidas (BME:TRE) Have A Healthy 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Técnicas Reunidas, S.A. (BME:TRE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Técnicas Reunidas

What Is Técnicas Reunidas's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Técnicas Reunidas had €716.6m of debt, an increase on €663.0m, over one year. But on the other hand it also has €801.9m in cash, leading to a €85.3m net cash position.

A Look At Técnicas Reunidas' Liabilities

The latest balance sheet data shows that Técnicas Reunidas had liabilities of €3.11b due within a year, and liabilities of €642.3m falling due after that. On the other hand, it had cash of €801.9m and €2.56b worth of receivables due within a year. So its liabilities total €389.5m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €539.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Técnicas Reunidas also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Técnicas Reunidas'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.

Over 12 months, Técnicas Reunidas made a loss at the EBIT level, and saw its revenue drop to €3.1b, which is a fall of 38%. To be frank that doesn't bode well.

So How Risky Is Técnicas Reunidas?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Técnicas Reunidas had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €121m and booked a €56m accounting loss. Given it only has net cash of €85.3m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Técnicas Reunidas (of which 1 doesn't sit too well with us!) you should know about.

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.

If you’re looking to trade Técnicas Reunidas, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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