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

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. We can see that Koninklijke BAM Groep nv (AMS:BAMNB) does use debt in its business. But the real question is whether this debt is making the company risky.

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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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Koninklijke BAM Groep's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Koninklijke BAM Groep had debt of €66.9m, up from €61.6m in one year. However, it does have €765.3m in cash offsetting this, leading to net cash of €698.4m.

A Look At Koninklijke BAM Groep's Liabilities

The latest balance sheet data shows that Koninklijke BAM Groep had liabilities of €2.66b due within a year, and liabilities of €336.8m falling due after that. Offsetting these obligations, it had cash of €765.3m as well as receivables valued at €1.19b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.04b.

Koninklijke BAM Groep has a market capitalization of €1.90b, 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. Despite its noteworthy liabilities, Koninklijke BAM Groep boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Koninklijke BAM Groep

But the bad news is that Koninklijke BAM Groep has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Koninklijke BAM Groep 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, Koninklijke BAM Groep burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Koninklijke BAM Groep does have more liabilities than liquid assets, it also has net cash of €698.4m. Despite its cash we think that Koninklijke BAM Groep seems to struggle to convert EBIT to free cash flow, so we are wary of the stock. 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. Case in point: We've spotted 3 warning signs for Koninklijke BAM Groep you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.