Is Koninklijke BAM Groep (AMS:BAMNB) A Risky Investment?

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. Importantly, Koninklijke BAM Groep nv (AMS:BAMNB) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Koninklijke BAM Groep

What Is Koninklijke BAM Groep's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Koninklijke BAM Groep had debt of €59.6m, up from €47.2m in one year. However, it does have €453.3m in cash offsetting this, leading to net cash of €393.7m.

A Look At Koninklijke BAM Groep's Liabilities

We can see from the most recent balance sheet that Koninklijke BAM Groep had liabilities of €2.56b falling due within a year, and liabilities of €345.0m due beyond that. On the other hand, it had cash of €453.3m and €1.50b worth of receivables due within a year. So it has liabilities totalling €953.7m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €1.16b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Koninklijke BAM Groep boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Koninklijke BAM Groep grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Koninklijke BAM Groep'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. Koninklijke BAM Groep 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. During the last three years, Koninklijke BAM Groep burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

Although Koninklijke BAM Groep's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €393.7m. And it impressed us with its EBIT growth of 59% over the last year. So we don't have any problem with Koninklijke BAM Groep's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Koninklijke BAM Groep (at least 1 which is concerning) , 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.