Sterling Infrastructure (NASDAQ:STRL) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Sterling Infrastructure, Inc. (NASDAQ:STRL) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sterling Infrastructure

How Much Debt Does Sterling Infrastructure Carry?

The image below, which you can click on for greater detail, shows that Sterling Infrastructure had debt of US$340.8m at the end of December 2023, a reduction from US$431.1m over a year. But on the other hand it also has US$471.6m in cash, leading to a US$130.7m net cash position.

How Healthy Is Sterling Infrastructure's Balance Sheet?

According to the last reported balance sheet, Sterling Infrastructure had liabilities of US$678.2m due within 12 months, and liabilities of US$475.2m due beyond 12 months. Offsetting these obligations, it had cash of US$471.6m as well as receivables valued at US$358.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$323.2m.

Of course, Sterling Infrastructure has a market capitalization of US$3.01b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Sterling Infrastructure boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Sterling Infrastructure has been able to increase its EBIT by 29% 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 ultimately the future profitability of the business will decide if Sterling Infrastructure can strengthen its balance sheet over time. 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. Sterling Infrastructure 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, Sterling Infrastructure actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Sterling Infrastructure does have more liabilities than liquid assets, it also has net cash of US$130.7m. The cherry on top was that in converted 143% of that EBIT to free cash flow, bringing in US$414m. So is Sterling Infrastructure's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Sterling Infrastructure you should know about.

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.