These 4 Measures Indicate That Great Lakes Dredge & Dock (NASDAQ:GLDD) Is Using Debt Extensively

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View 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 September 2024, Great Lakes Dredge & Dock had US$412.5m of debt, up from US$376.9m a year ago. Click the image for more detail. On the flip side, it has US$12.0m in cash leading to net debt of about US$400.5m.

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$177.7m due within a year, and liabilities of US$542.2m falling due after that. Offsetting this, it had US$12.0m in cash and US$134.3m in receivables that were due within 12 months. So its liabilities total US$573.6m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$767.6m, 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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Great Lakes Dredge & Dock has a debt to EBITDA ratio of 3.2 and its EBIT covered its interest expense 5.3 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. We also note that Great Lakes Dredge & Dock improved its EBIT from a last year's loss to a positive US$83m. 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 Great Lakes Dredge & Dock'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, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, Great Lakes Dredge & Dock burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

We'd go so far as to say Great Lakes Dredge & Dock's conversion of EBIT to free cash flow was disappointing. Having said that, its ability to cover its interest expense with its EBIT isn't such a worry. Looking at the bigger picture, it seems clear to us that Great Lakes Dredge & Dock's use of debt is creating risks for the company. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Great Lakes Dredge & Dock (including 1 which is a bit unpleasant) .

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.