Granite Construction (NYSE:GVA) Has Debt But No Earnings; Should You Worry?

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. 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 Granite Construction Incorporated (NYSE:GVA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Granite Construction

How Much Debt Does Granite Construction Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2019 Granite Construction had US$408.7m of debt, an increase on US$434, over one year. However, its balance sheet shows it holds US$432.4m in cash, so it actually has US$23.7m net cash.

NYSE:GVA Historical Debt, January 24th 2020
NYSE:GVA Historical Debt, January 24th 2020

A Look At Granite Construction’s Liabilities

Zooming in on the latest balance sheet data, we can see that Granite Construction had liabilities of US$855.8m due within 12 months and liabilities of US$514.7m due beyond that. On the other hand, it had cash of US$432.4m and US$934.3m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Granite Construction’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$1.23b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Granite Construction boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Granite Construction’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.

In the last year Granite Construction wasn’t profitable at an EBIT level, but managed to grow its revenue by 5.0%, to US$3.4b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Granite Construction?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Granite Construction had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$63m of cash and made a loss of US$105m. Given it only has net cash of US$23.7m, the company may need to raise more capital if it doesn’t reach break-even soon. Overall, we’d say the stock is a bit risky, and we’re usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. For instance, we’ve identified 3 warning signs for Granite Construction that 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.