These 4 Measures Indicate That EMCOR Group (NYSE:EME) Is Using Debt Safely

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 can see that EMCOR Group, Inc. (NYSE:EME) does use debt in its business. But is this debt a concern to shareholders?

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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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is EMCOR Group's Debt?

As you can see below, at the end of March 2025, EMCOR Group had US$250.0m of debt, up from none a year ago. Click the image for more detail. But it also has US$576.7m in cash to offset that, meaning it has US$326.7m net cash.

How Healthy Is EMCOR Group's Balance Sheet?

The latest balance sheet data shows that EMCOR Group had liabilities of US$4.22b due within a year, and liabilities of US$904.7m falling due after that. Offsetting these obligations, it had cash of US$576.7m as well as receivables valued at US$4.15b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$401.1m.

This state of affairs indicates that EMCOR Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$21.1b 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.

View our latest analysis for EMCOR Group

In addition to that, we're happy to report that EMCOR Group has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, EMCOR Group recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that EMCOR Group has US$326.7m in net cash. And it impressed us with free cash flow of US$1.3b, being 92% of its EBIT. So we don't think EMCOR Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for EMCOR Group you should be aware of.

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.