Is Fluor (NYSE:FLR) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Fluor Corporation (NYSE:FLR) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Fluor

What Is Fluor's Net Debt?

As you can see below, Fluor had US$1.12b of debt at September 2024, down from US$1.44b a year prior. But it also has US$3.01b in cash to offset that, meaning it has US$1.89b net cash.

How Healthy Is Fluor's Balance Sheet?

The latest balance sheet data shows that Fluor had liabilities of US$2.98b due within a year, and liabilities of US$1.78b falling due after that. On the other hand, it had cash of US$3.01b and US$2.11b worth of receivables due within a year. So it can boast US$359.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Fluor could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Fluor boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Fluor if management cannot prevent a repeat of the 26% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Fluor'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 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. During the last three years, Fluor generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fluor has net cash of US$1.89b, as well as more liquid assets than liabilities. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in US$636m. So we don't have any problem with Fluor's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Fluor insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.