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.' 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 Koninklijke BAM Groep nv (AMS:BAMNB) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Koninklijke BAM Groep's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Koninklijke BAM Groep had €676.4m of debt, an increase on €287.3m, over one year. But on the other hand it also has €1.28b in cash, leading to a €607.2m net cash position.
How Strong Is Koninklijke BAM Groep's Balance Sheet?
The latest balance sheet data shows that Koninklijke BAM Groep had liabilities of €4.04b due within a year, and liabilities of €584.3m falling due after that. On the other hand, it had cash of €1.28b and €1.83b worth of receivables due within a year. So its liabilities total €1.5b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the €328.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Koninklijke BAM Groep would likely require a major re-capitalisation if it had to pay its creditors today. Given that Koninklijke BAM Groep has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Koninklijke BAM Groep can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Koninklijke BAM Groep made a loss at the EBIT level, and saw its revenue drop to €6.9b, which is a fall of 7.6%. That's not what we would hope to see.
So How Risky Is Koninklijke BAM Groep?
Although Koninklijke BAM Groep had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €543m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Koninklijke BAM Groep 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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