Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Budimex SA (WSE:BDX) does carry debt. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
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What Is Budimex's Debt?
The image below, which you can click on for greater detail, shows that Budimex had debt of zł202.7m at the end of September 2022, a reduction from zł253.8m over a year. However, it does have zł2.36b in cash offsetting this, leading to net cash of zł2.15b.
A Look At Budimex's Liabilities
According to the last reported balance sheet, Budimex had liabilities of zł4.92b due within 12 months, and liabilities of zł1.02b due beyond 12 months. On the other hand, it had cash of zł2.36b and zł2.25b worth of receivables due within a year. So it has liabilities totalling zł1.34b more than its cash and near-term receivables, combined.
Of course, Budimex has a market capitalization of zł7.07b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Budimex boasts net cash, so it's fair to say it does not have a heavy debt load!
While Budimex doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Budimex 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 Budimex 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, Budimex 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 Budimex does have more liabilities than liquid assets, it also has net cash of zł2.15b. The cherry on top was that in converted 169% of that EBIT to free cash flow, bringing in zł509m. So is Budimex'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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Budimex .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
About WSE:BDX
Budimex
Operates as an infrastructure and services company in Poland, Germany, and internationally.
Flawless balance sheet with solid track record.