Here's Why Técnicas Reunidas (BME:TRE) Can Manage Its Debt Responsibly

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.' 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. As with many other companies Técnicas Reunidas, S.A. (BME:TRE) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Técnicas Reunidas

How Much Debt Does Técnicas Reunidas Carry?

As you can see below, Técnicas Reunidas had €651.6m of debt at September 2024, down from €769.2m a year prior. However, it does have €950.0m in cash offsetting this, leading to net cash of €298.4m.

How Healthy Is Técnicas Reunidas' Balance Sheet?

According to the last reported balance sheet, Técnicas Reunidas had liabilities of €3.46b due within 12 months, and liabilities of €443.6m due beyond 12 months. Offsetting these obligations, it had cash of €950.0m as well as receivables valued at €2.93b due within 12 months. So these liquid assets roughly match the total liabilities.

Given Técnicas Reunidas has a market capitalization of €808.5m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

And we also note warmly that Técnicas Reunidas grew its EBIT by 10% last year, making its debt load easier to handle. 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'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. Técnicas Reunidas 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. In the last two years, Técnicas Reunidas's free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 €298.4m. And it also grew its EBIT by 10% over the last year. So we don't have any problem with Técnicas Reunidas's use of debt. There's no doubt that we learn most about debt from the balance sheet. 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 1 warning sign for Técnicas Reunidas you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.