These 4 Measures Indicate That Webuild (BIT:WBD) Is Using Debt Reasonably Well

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. Importantly, Webuild S.p.A. (BIT:WBD) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Webuild

What Is Webuild's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Webuild had €2.64b of debt, an increase on €2.52b, over one year. However, its balance sheet shows it holds €3.22b in cash, so it actually has €577.3m net cash.

How Strong Is Webuild's Balance Sheet?

According to the last reported balance sheet, Webuild had liabilities of €13.6b due within 12 months, and liabilities of €2.33b due beyond 12 months. On the other hand, it had cash of €3.22b and €9.76b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.97b.

When you consider that this deficiency exceeds the company's €2.83b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Webuild boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Pleasingly, Webuild is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 1,708% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Webuild can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Webuild 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 two years, Webuild 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

While Webuild does have more liabilities than liquid assets, it also has net cash of €577.3m. And it impressed us with free cash flow of €1.3b, being 3,424% of its EBIT. So we are not troubled with Webuild'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. For example, we've discovered 1 warning sign for Webuild that you should be aware of before investing here.

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.