Does Técnicas Reunidas (BME:TRE) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Técnicas Reunidas, S.A. (BME:TRE) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Técnicas Reunidas

What Is Técnicas Reunidas's Debt?

As you can see below, Técnicas Reunidas had €641.2m of debt at March 2024, down from €789.2m a year prior. But on the other hand it also has €973.8m in cash, leading to a €332.6m net cash position.

A Look At Técnicas Reunidas' Liabilities

The latest balance sheet data shows that Técnicas Reunidas had liabilities of €3.47b due within a year, and liabilities of €456.3m falling due after that. Offsetting these obligations, it had cash of €973.8m as well as receivables valued at €2.89b due within 12 months. So these liquid assets roughly match the total liabilities.

Given Técnicas Reunidas has a market capitalization of €930.7m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Técnicas Reunidas boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Técnicas Reunidas grew its EBIT by 354% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Técnicas Reunidas 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Técnicas Reunidas 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 two years, Técnicas Reunidas produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Técnicas Reunidas's liabilities, but we can be reassured by the fact it has has net cash of €332.6m. And we liked the look of last year's 354% year-on-year EBIT growth. So is Técnicas Reunidas's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Técnicas Reunidas that you should be aware of before investing here.

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.

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