These 4 Measures Indicate That Morgan Sindall Group (LON:MGNS) Is Using Debt Safely

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 Morgan Sindall Group plc (LON:MGNS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Morgan Sindall Group

What Is Morgan Sindall Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Morgan Sindall Group had debt of UK£77.1m, up from UK£60.0m in one year. However, its balance sheet shows it holds UK£414.2m in cash, so it actually has UK£337.1m net cash.

How Strong 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. Offsetting this, it had UK£414.2m in cash and UK£458.6m in receivables that were due within 12 months. So it has liabilities totalling UK£247.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Morgan Sindall Group is worth UK£1.11b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. And it impressed us with free cash flow of UK£233m, being 151% 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. For example, we've discovered 1 warning sign for Morgan Sindall Group that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.