Sterling Infrastructure (NASDAQ:STRL) Seems To Use Debt Rather Sparingly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Sterling Infrastructure, Inc. (NASDAQ:STRL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sterling Infrastructure

What Is Sterling Infrastructure's Debt?

As you can see below, Sterling Infrastructure had US$334.6m of debt at March 2024, down from US$400.4m a year prior. However, it does have US$480.4m in cash offsetting this, leading to net cash of US$145.9m.

How Healthy Is Sterling Infrastructure's Balance Sheet?

The latest balance sheet data shows that Sterling Infrastructure had liabilities of US$705.7m due within a year, and liabilities of US$459.6m falling due after that. Offsetting these obligations, it had cash of US$480.4m as well as receivables valued at US$380.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$304.3m.

Given Sterling Infrastructure has a market capitalization of US$3.56b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sterling Infrastructure boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Sterling Infrastructure grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sterling Infrastructure'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sterling Infrastructure 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. Happily for any shareholders, Sterling Infrastructure actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sterling Infrastructure has US$145.9m in net cash. The cherry on top was that in converted 138% of that EBIT to free cash flow, bringing in US$407m. So is Sterling Infrastructure's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Sterling Infrastructure would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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