Is Koninklijke BAM Groep (AMS:BAMNB) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Koninklijke BAM Groep nv (AMS:BAMNB) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Koninklijke BAM Groep

What Is Koninklijke BAM Groep's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Koninklijke BAM Groep had €634.6m of debt, an increase on €281.1m, over one year. But it also has €1.79b in cash to offset that, meaning it has €1.16b net cash.

How Strong Is Koninklijke BAM Groep's Balance Sheet?

The latest balance sheet data shows that Koninklijke BAM Groep had liabilities of €3.56b due within a year, and liabilities of €1.08b falling due after that. Offsetting these obligations, it had cash of €1.79b as well as receivables valued at €1.42b due within 12 months. So it has liabilities totalling €1.43b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €267.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Koninklijke BAM Groep would probably need a major re-capitalization if its creditors were to demand repayment. 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. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Koninklijke BAM Groep had a loss before interest and tax, and actually shrunk its revenue by 5.7%, to €6.8b. 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 €554m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Koninklijke BAM Groep you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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