Does Morgan Sindall Group (LON:MGNS) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Morgan Sindall Group plc (LON:MGNS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Morgan Sindall Group

How Much Debt Does Morgan Sindall Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Morgan Sindall Group had UK£77.1m of debt, an increase on UK£60.0m, over one year. However, its balance sheet shows it holds UK£414.2m in cash, so it actually has UK£337.1m net cash.

How Healthy Is Morgan Sindall Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Morgan Sindall Group had liabilities of UK£1.04b due within 12 months and liabilities of UK£80.3m due beyond that. On the other hand, it had cash of UK£414.2m and UK£458.6m worth of receivables due within a year. So its liabilities total UK£247.7m more than the combination of its cash and short-term receivables.

Morgan Sindall Group has a market capitalization of UK£1.15b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Morgan Sindall Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Morgan Sindall Group has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. 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 Morgan Sindall Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Morgan Sindall Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Morgan Sindall Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Morgan Sindall Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£337.1m. The cherry on top was that in converted 151% of that EBIT to free cash flow, bringing in UK£233m. So we don't think Morgan Sindall Group's use of debt is risky. 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. We've identified 2 warning signs with Morgan Sindall Group , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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