We Think Sterling Infrastructure (NASDAQ:STRL) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Sterling Infrastructure, Inc. (NASDAQ:STRL) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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$356.0m at the end of September 2023, a reduction from US$436.5m over a year. However, its balance sheet shows it holds US$409.4m in cash, so it actually has US$53.4m net cash.

How Strong Is Sterling Infrastructure's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sterling Infrastructure had liabilities of US$685.8m due within 12 months and liabilities of US$452.5m due beyond that. Offsetting these obligations, it had cash of US$409.4m as well as receivables valued at US$448.3m due within 12 months. So its liabilities total US$280.7m more than the combination of its cash and short-term receivables.

Of course, Sterling Infrastructure has a market capitalization of US$2.62b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Sterling Infrastructure also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Sterling Infrastructure grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, Sterling Infrastructure actually produced more free cash flow than EBIT over the last three years. 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$53.4m. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in US$350m. So we don't think Sterling Infrastructure's use of debt is risky. We'd be very excited to see if Sterling Infrastructure insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.

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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.