Morgan Sindall Group (LON:MGNS) Could Easily Take On More Debt

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.' 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. We note that Morgan Sindall Group plc (LON:MGNS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Morgan Sindall Group

What Is Morgan Sindall Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Morgan Sindall Group had UK£110.6m of debt, an increase on UK£67.7m, over one year. However, it does have UK£468.6m in cash offsetting this, leading to net cash of UK£358.0m.

How Healthy Is Morgan Sindall Group's Balance Sheet?

The latest balance sheet data shows that Morgan Sindall Group had liabilities of UK£1.13b due within a year, and liabilities of UK£106.5m falling due after that. Offsetting these obligations, it had cash of UK£468.6m as well as receivables valued at UK£553.9m due within 12 months. So it has liabilities totalling UK£210.9m more than its cash and near-term receivables, combined.

Since publicly traded Morgan Sindall Group shares are worth a total of UK£1.08b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Morgan Sindall Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Morgan Sindall Group grew its EBIT by 106% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Morgan Sindall Group 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, 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

While Morgan Sindall Group does have more liabilities than liquid assets, it also has net cash of UK£358.0m. And it impressed us with free cash flow of UK£103m, being 114% of its EBIT. So we don't think Morgan Sindall Group's use of debt is risky. 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. Be aware that Morgan Sindall Group is showing 2 warning signs in our investment analysis , you should know about...

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.