Royal Boskalis Westminster (AMS:BOKA) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Royal Boskalis Westminster N.V. (AMS:BOKA) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Royal Boskalis Westminster

What Is Royal Boskalis Westminster's Debt?

The image below, which you can click on for greater detail, shows that Royal Boskalis Westminster had debt of €397.1m at the end of June 2021, a reduction from €522.7m over a year. But it also has €609.9m in cash to offset that, meaning it has €212.8m net cash.

A Look At Royal Boskalis Westminster's Liabilities

Zooming in on the latest balance sheet data, we can see that Royal Boskalis Westminster had liabilities of €1.75b due within 12 months and liabilities of €576.9m due beyond that. Offsetting this, it had €609.9m in cash and €731.8m in receivables that were due within 12 months. So it has liabilities totalling €985.1m more than its cash and near-term receivables, combined.

Royal Boskalis Westminster has a market capitalization of €3.33b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Royal Boskalis Westminster boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Royal Boskalis Westminster has increased its EBIT by 4.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Royal Boskalis Westminster can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Royal Boskalis Westminster 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. Happily for any shareholders, Royal Boskalis Westminster actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Royal Boskalis Westminster does have more liabilities than liquid assets, it also has net cash of €212.8m. The cherry on top was that in converted 199% of that EBIT to free cash flow, bringing in €129m. So is Royal Boskalis Westminster's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for Royal Boskalis Westminster that you should be aware of.

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.

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.

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