Is Royal Boskalis Westminster (AMS:BOKA) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Royal Boskalis Westminster N.V. (AMS:BOKA) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Royal Boskalis Westminster

How Much Debt Does Royal Boskalis Westminster Carry?

The chart below, which you can click on for greater detail, shows that Royal Boskalis Westminster had €386.0m in debt in December 2020; about the same as the year before. But it also has €824.5m in cash to offset that, meaning it has €438.6m net cash.

How Healthy Is Royal Boskalis Westminster's Balance Sheet?

The latest balance sheet data shows that Royal Boskalis Westminster had liabilities of €1.69b due within a year, and liabilities of €548.9m falling due after that. On the other hand, it had cash of €824.5m and €731.8m worth of receivables due within a year. So its liabilities total €685.3m more than the combination of its cash and short-term receivables.

Since publicly traded Royal Boskalis Westminster shares are worth a total of €3.57b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Royal Boskalis Westminster boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Royal Boskalis Westminster grew its EBIT by 173% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Royal Boskalis Westminster 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Royal Boskalis Westminster 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 three years, Royal Boskalis Westminster actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Royal Boskalis Westminster does have more liabilities than liquid assets, it also has net cash of €438.6m. The cherry on top was that in converted 263% of that EBIT to free cash flow, bringing in €472m. So is Royal Boskalis Westminster's debt a risk? It doesn't seem so to us. 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. Be aware that Royal Boskalis Westminster is showing 1 warning sign in our investment analysis , you should know about...

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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This article by Simply Wall St is general in nature. 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.
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