We Think Koninklijke BAM Groep (AMS:BAMNB) Is Taking Some Risk With Its Debt

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. 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.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Koninklijke BAM Groep

How Much Debt Does Koninklijke BAM Groep Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Koninklijke BAM Groep had €59.6m of debt, an increase on €47.2m, over one year. But on the other hand it also has €453.3m in cash, leading to a €393.7m net cash position.

A Look At Koninklijke BAM Groep's Liabilities

The latest balance sheet data shows that Koninklijke BAM Groep had liabilities of €2.56b due within a year, and liabilities of €345.0m falling due after that. Offsetting this, it had €453.3m in cash and €1.50b in receivables that were due within 12 months. 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 €954.9m. 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!

In addition to that, we're happy to report that Koninklijke BAM Groep has boosted its EBIT by 59%, thus reducing the spectre of future debt repayments. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Koninklijke BAM Groep saw substantial negative free cash flow, in total. 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 €393.7m. And it impressed us with its EBIT growth of 59% over the last year. So although we see some areas for improvement, we're not too worried about Koninklijke BAM Groep's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Koninklijke BAM Groep (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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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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.