Health Check: How Prudently Does Técnicas Reunidas (BME:TRE) Use Debt?

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.' 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 Técnicas Reunidas, S.A. (BME:TRE) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Técnicas Reunidas

What Is Técnicas Reunidas's Debt?

You can click the graphic below for the historical numbers, but it shows that Técnicas Reunidas had €803.9m of debt in June 2021, down from €869.2m, one year before. But on the other hand it also has €898.1m in cash, leading to a €94.2m net cash position.

A Look At Técnicas Reunidas' Liabilities

According to the last reported balance sheet, Técnicas Reunidas had liabilities of €3.16b due within 12 months, and liabilities of €732.5m due beyond 12 months. Offsetting this, it had €898.1m in cash and €2.47b in receivables that were due within 12 months. So its liabilities total €527.8m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of €427.6m, we think shareholders really should watch Técnicas Reunidas's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Técnicas Reunidas 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. 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.

In the last year Técnicas Reunidas had a loss before interest and tax, and actually shrunk its revenue by 38%, to €2.8b. That makes us nervous, to say the least.

So How Risky Is Técnicas Reunidas?

Although Técnicas Reunidas had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €11m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. When analysing debt levels, the balance sheet is the obvious place to start. 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 Técnicas Reunidas you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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