Does EMCOR Group (NYSE:EME) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that EMCOR Group, Inc. (NYSE:EME) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for EMCOR Group

What Is EMCOR Group's Net Debt?

The image below, which you can click on for greater detail, shows that EMCOR Group had debt of US$241.2m at the end of June 2023, a reduction from US$254.1m over a year. However, its balance sheet shows it holds US$503.1m in cash, so it actually has US$261.8m net cash.

How Strong Is EMCOR Group's Balance Sheet?

According to the last reported balance sheet, EMCOR Group had liabilities of US$2.95b due within 12 months, and liabilities of US$840.1m due beyond 12 months. Offsetting these obligations, it had cash of US$503.1m as well as receivables valued at US$3.16b due within 12 months. So it has liabilities totalling US$130.0m more than its cash and near-term receivables, combined.

Having regard to EMCOR Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$9.81b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, EMCOR Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, EMCOR Group grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine EMCOR Group'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. EMCOR Group 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. During the last three years, EMCOR Group generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that EMCOR Group has US$261.8m in net cash. And it impressed us with free cash flow of US$674m, being 82% of its EBIT. So is EMCOR Group's debt a risk? It doesn't seem so to us. We'd be very excited to see if EMCOR Group 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.

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.