Morgan Sindall Group (LON:MGNS) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Morgan Sindall Group plc (LON:MGNS) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Morgan Sindall Group had UK£77.1m of debt in December 2022, down from UK£110.6m, one year before. But on the other hand it also has UK£431.7m in cash, leading to a UK£354.6m net cash position.

A Look At Morgan Sindall Group's Liabilities

We can see from the most recent balance sheet that Morgan Sindall Group had liabilities of UK£1.19b falling due within a year, and liabilities of UK£107.0m due beyond that. Offsetting these obligations, it had cash of UK£431.7m as well as receivables valued at UK£635.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£231.5m.

Morgan Sindall Group has a market capitalization of UK£774.6m, 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. While it does have liabilities worth noting, Morgan Sindall Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Morgan Sindall Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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£354.6m. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in UK£43m. So we are not troubled with Morgan Sindall Group's debt use. 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. We've identified 3 warning signs with Morgan Sindall Group , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.