Fluor (NYSE:FLR) Seems To Use Debt Quite Sensibly

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. As with many other companies Fluor Corporation (NYSE:FLR) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Fluor

What Is Fluor's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Fluor had US$1.16b of debt in June 2022, down from US$1.68b, one year before. However, its balance sheet shows it holds US$2.19b in cash, so it actually has US$1.03b net cash.

How Strong Is Fluor's Balance Sheet?

According to the last reported balance sheet, Fluor had liabilities of US$3.13b due within 12 months, and liabilities of US$1.71b due beyond 12 months. Offsetting this, it had US$2.19b in cash and US$2.04b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$597.0m.

Given Fluor has a market capitalization of US$3.49b, 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. While it does have liabilities worth noting, Fluor also has more cash than debt, so we're pretty confident it can manage its debt safely.

We saw Fluor grow its EBIT by 4.1% in the last twelve months. Whilst that hardly knocks our socks off it is a positive when it comes to debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fluor 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. While Fluor 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, Fluor recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

Although Fluor's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.03b. And it also grew its EBIT by 4.1% over the last year. So we don't have any problem with Fluor's use of debt. We'd be motivated to research the stock further if we found out that Fluor insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.