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

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. As with many other companies Morgan Sindall Group plc (LON:MGNS) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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?

The image below, which you can click on for greater detail, shows that Morgan Sindall Group had debt of UK£63.8m at the end of June 2023, a reduction from UK£78.8m over a year. However, it does have UK£326.9m in cash offsetting this, leading to net cash of UK£263.1m.

How Healthy Is Morgan Sindall Group's Balance Sheet?

We can see from the most recent balance sheet that Morgan Sindall Group had liabilities of UK£1.18b falling due within a year, and liabilities of UK£104.5m due beyond that. Offsetting these obligations, it had cash of UK£326.9m as well as receivables valued at UK£648.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£308.3m.

This deficit isn't so bad because Morgan Sindall Group is worth UK£953.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Morgan Sindall Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Morgan Sindall Group saw its EBIT drop by 7.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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. During the last three years, Morgan Sindall Group generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Morgan Sindall Group does have more liabilities than liquid assets, it also has net cash of UK£263.1m. And it impressed us with free cash flow of UK£57m, being 89% of its EBIT. So we don't have any problem with Morgan Sindall Group's use of debt. 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 3 warning signs in our investment analysis , you should know about...

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. 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.