Koninklijke BAM Groep (AMS:BAMNB) Has A Somewhat Strained Balance Sheet

Simply Wall St
August 27, 2021
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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. We can see that Koninklijke BAM Groep nv (AMS:BAMNB) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Koninklijke BAM Groep

How Much Debt Does Koninklijke BAM Groep Carry?

As you can see below, Koninklijke BAM Groep had €95.4m of debt at June 2021, down from €676.4m a year prior. But it also has €1.24b in cash to offset that, meaning it has €1.14b net cash.

ENXTAM:BAMNB Debt to Equity History August 28th 2021

How Strong Is Koninklijke BAM Groep's Balance Sheet?

The latest balance sheet data shows that Koninklijke BAM Groep had liabilities of €3.54b due within a year, and liabilities of €673.2m falling due after that. Offsetting these obligations, it had cash of €1.24b as well as receivables valued at €1.73b due within 12 months. So its liabilities total €1.25b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €740.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. 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.

Notably, Koninklijke BAM Groep made a loss at the EBIT level, last year, but improved that to positive EBIT of €78m in the last twelve months. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last year, Koninklijke BAM Groep 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 Koninklijke BAM Groep does have more liabilities than liquid assets, it also has net cash of €1.14b. And it impressed us with free cash flow of €500m, being 639% of its EBIT. So while Koninklijke BAM Groep does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Koninklijke BAM Groep , 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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