EMCOR Group (NYSE:EME) Has A Rock Solid Balance Sheet

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.' 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. Importantly, EMCOR Group, Inc. (NYSE:EME) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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$240.7m at the end of December 2022, a reduction from US$253.6m over a year. But it also has US$456.4m in cash to offset that, meaning it has US$215.7m net cash.

A Look At EMCOR Group's Liabilities

According to the last reported balance sheet, EMCOR Group had liabilities of US$2.75b due within 12 months, and liabilities of US$796.8m due beyond 12 months. Offsetting this, it had US$456.4m in cash and US$2.86b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$237.3m.

Given EMCOR Group has a market capitalization of US$7.47b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

The good news is that EMCOR Group has increased its EBIT by 6.5% over twelve months, which should ease any concerns about debt repayment. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While EMCOR Group 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. Over the last three years, EMCOR Group recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about EMCOR Group's liabilities, but we can be reassured by the fact it has has net cash of US$215.7m. And it impressed us with free cash flow of US$449m, being 93% 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.