engcon (STO:ENGCON B) Has A Pretty Healthy Balance Sheet

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. Importantly, engcon AB (publ) (STO:ENGCON B) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for engcon

How Much Debt Does engcon Carry?

You can click the graphic below for the historical numbers, but it shows that engcon had kr33.0m of debt in September 2024, down from kr48.0m, one year before. But on the other hand it also has kr104.0m in cash, leading to a kr71.0m net cash position.

How Healthy Is engcon's Balance Sheet?

We can see from the most recent balance sheet that engcon had liabilities of kr403.0m falling due within a year, and liabilities of kr93.0m due beyond that. Offsetting this, it had kr104.0m in cash and kr356.0m in receivables that were due within 12 months. So its liabilities total kr36.0m more than the combination of its cash and short-term receivables.

Having regard to engcon's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr15.9b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, engcon boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact engcon's saving grace is its low debt levels, because its EBIT has tanked 43% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine engcon'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. While engcon 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. During the last three years, engcon produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that engcon has kr71.0m in net cash. And it impressed us with free cash flow of kr179m, being 67% of its EBIT. So we don't have any problem with engcon's use of debt. 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. Case in point: We've spotted 1 warning sign for engcon you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.