Is Costain Group (LON:COST) Weighed On By Its Debt Load?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Costain Group PLC (LON:COST) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Costain Group

What Is Costain Group's Debt?

The image below, which you can click on for greater detail, shows that Costain Group had debt of UK£46.8m at the end of December 2020, a reduction from UK£116.0m over a year. But on the other hand it also has UK£150.9m in cash, leading to a UK£104.1m net cash position.

A Look At Costain Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Costain Group had liabilities of UK£266.3m due within 12 months and liabilities of UK£67.1m due beyond that. On the other hand, it had cash of UK£150.9m and UK£218.9m worth of receivables due within a year. So it can boast UK£36.4m more liquid assets than total liabilities.

This surplus suggests that Costain Group is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Costain Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Costain Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Costain Group made a loss at the EBIT level, and saw its revenue drop to UK£978m, which is a fall of 15%. We would much prefer see growth.

So How Risky Is Costain Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Costain Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through UK£51m of cash and made a loss of UK£78m. Given it only has net cash of UK£104.1m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 Costain Group that you should be aware of before investing here.

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. 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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