engcon (STO:ENGCON B) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, engcon AB (publ) (STO:ENGCON B) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is engcon's Net Debt?

As you can see below, engcon had kr53.0m of debt at March 2024, down from kr224.0m a year prior. However, it does have kr59.0m in cash offsetting this, leading to net cash of kr6.00m.

How Strong Is engcon's Balance Sheet?

We can see from the most recent balance sheet that engcon had liabilities of kr338.0m falling due within a year, and liabilities of kr104.0m due beyond that. On the other hand, it had cash of kr59.0m and kr366.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr17.0m.

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 kr13.8b 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!

It is just as well that engcon's load is not too heavy, because its EBIT was down 53% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the most recent three years, engcon recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about engcon's liabilities, but we can be reassured by the fact it has has net cash of kr6.00m. So we are not troubled with engcon's debt use. 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. Case in point: We've spotted 1 warning sign for engcon you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.