Is Balfour Beatty (LON:BBY) Using Too Much Debt?

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.' 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. Importantly, Balfour Beatty plc (LON:BBY) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Balfour Beatty

How Much Debt Does Balfour Beatty Carry?

The image below, which you can click on for greater detail, shows that Balfour Beatty had debt of UK£477.0m at the end of June 2023, a reduction from UK£612.0m over a year. But on the other hand it also has UK£927.0m in cash, leading to a UK£450.0m net cash position.

A Look At Balfour Beatty's Liabilities

Zooming in on the latest balance sheet data, we can see that Balfour Beatty had liabilities of UK£2.71b due within 12 months and liabilities of UK£1.07b due beyond that. Offsetting this, it had UK£927.0m in cash and UK£1.30b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£1.56b.

This is a mountain of leverage relative to its market capitalization of UK£1.77b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Balfour Beatty boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Balfour Beatty grew its EBIT by 510% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Balfour Beatty'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 company can only pay off debt with cold hard cash, not accounting profits. Balfour Beatty 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. Happily for any shareholders, Balfour Beatty actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Balfour Beatty does have more liabilities than liquid assets, it also has net cash of UK£450.0m. And it impressed us with free cash flow of UK£148m, being 235% of its EBIT. So we don't think Balfour Beatty's use of debt is risky. 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. Be aware that Balfour Beatty is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.

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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.