These 4 Measures Indicate That Balfour Beatty (LON:BBY) Is Using Debt Reasonably Well

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.' 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. We note that Balfour Beatty plc (LON:BBY) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Balfour Beatty

What Is Balfour Beatty's Net Debt?

As you can see below, at the end of December 2023, Balfour Beatty had UK£838.0m of debt, up from UK£607.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds UK£1.41b in cash, so it actually has UK£576.0m net cash.

How Strong Is Balfour Beatty's Balance Sheet?

According to the last reported balance sheet, Balfour Beatty had liabilities of UK£2.72b due within 12 months, and liabilities of UK£1.34b due beyond 12 months. Offsetting these obligations, it had cash of UK£1.41b as well as receivables valued at UK£1.13b due within 12 months. So it has liabilities totalling UK£1.51b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of UK£1.87b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Balfour Beatty boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Balfour Beatty's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Balfour Beatty 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 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. Over the last three years, Balfour Beatty actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Balfour Beatty does have more liabilities than liquid assets, it also has net cash of UK£576.0m. The cherry on top was that in converted 199% of that EBIT to free cash flow, bringing in UK£189m. So we don't have any problem with Balfour Beatty's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Balfour Beatty .

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.