Is Great Lakes Dredge & Dock (NASDAQ:GLDD) Weighed On By Its Debt Load?

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. As with many other companies Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for Great Lakes Dredge & Dock

What Is Great Lakes Dredge & Dock's Net Debt?

As you can see below, at the end of June 2023, Great Lakes Dredge & Dock had US$376.8m of debt, up from US$321.2m a year ago. Click the image for more detail. On the flip side, it has US$42.1m in cash leading to net debt of about US$334.7m.

How Strong Is Great Lakes Dredge & Dock's Balance Sheet?

The latest balance sheet data shows that Great Lakes Dredge & Dock had liabilities of US$141.3m due within a year, and liabilities of US$497.7m falling due after that. Offsetting these obligations, it had cash of US$42.1m as well as receivables valued at US$86.2m due within 12 months. So it has liabilities totalling US$510.8m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$522.6m, so it does suggest shareholders should keep an eye on Great Lakes Dredge & Dock's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Great Lakes Dredge & Dock's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Great Lakes Dredge & Dock made a loss at the EBIT level, and saw its revenue drop to US$596m, which is a fall of 18%. That's not what we would hope to see.

Caveat Emptor

Not only did Great Lakes Dredge & Dock's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$36m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$91m of cash over the last year. So in short it's a really risky stock. 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. We've identified 1 warning sign with Great Lakes Dredge & Dock , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.