These 4 Measures Indicate That Granite Construction (NYSE:GVA) Is Using Debt Reasonably Well

Simply Wall St
October 25, 2021
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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. We note that Granite Construction Incorporated (NYSE:GVA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Granite Construction

What Is Granite Construction's Debt?

As you can see below, Granite Construction had US$345.7m of debt at June 2021, down from US$423.1m a year prior. But on the other hand it also has US$588.6m in cash, leading to a US$242.9m net cash position.

NYSE:GVA Debt to Equity History October 26th 2021

How Strong Is Granite Construction's Balance Sheet?

We can see from the most recent balance sheet that Granite Construction had liabilities of US$1.05b falling due within a year, and liabilities of US$442.4m due beyond that. Offsetting these obligations, it had cash of US$588.6m as well as receivables valued at US$841.4m due within 12 months. So it has liabilities totalling US$60.6m more than its cash and near-term receivables, combined.

Of course, Granite Construction has a market capitalization of US$1.87b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Granite Construction boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Granite Construction improved its EBIT from a last year's loss to a positive US$97m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Granite Construction 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Granite Construction 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 year, Granite Construction actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Granite Construction has US$242.9m in net cash. And it impressed us with free cash flow of US$138m, being 142% of its EBIT. So is Granite Construction's debt a risk? It doesn't seem so to us. While Granite Construction didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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