These 4 Measures Indicate That Budimex (WSE:BDX) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Budimex SA (WSE:BDX) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Budimex

What Is Budimex's Net Debt?

The image below, which you can click on for greater detail, shows that Budimex had debt of zł223.6m at the end of March 2022, a reduction from zł296.0m over a year. But it also has zł3.11b in cash to offset that, meaning it has zł2.89b net cash.

How Healthy Is Budimex's Balance Sheet?

The latest balance sheet data shows that Budimex had liabilities of zł4.95b due within a year, and liabilities of zł1.02b falling due after that. On the other hand, it had cash of zł3.11b and zł1.89b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł970.7m.

Given Budimex has a market capitalization of zł5.59b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Budimex also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Budimex has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. 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 Budimex'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Budimex 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, Budimex actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Budimex's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł2.89b. And it impressed us with free cash flow of zł614m, being 214% of its EBIT. So we don't think Budimex's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Budimex you should be aware of, and 1 of them is a bit unpleasant.

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.