Yahoo Finance These 4 Measures Indicate That Heijmans (AMS:HEIJM) Is Using Debt Reasonably Well
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Heijmans N.V. (AMS:HEIJM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.
See our latest analysis for Heijmans
How Much Debt Does Heijmans Carry?
As you can see below, Heijmans had €53.2m of debt at December 2019, down from €58.3m a year prior. However, its balance sheet shows it holds €109.4m in cash, so it actually has €56.1m net cash.
How Healthy Is Heijmans's Balance Sheet?
The latest balance sheet data shows that Heijmans had liabilities of €576.4m due within a year, and liabilities of €144.1m falling due after that. Offsetting these obligations, it had cash of €109.4m as well as receivables valued at €250.0m due within 12 months. So it has liabilities totalling €361.1m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the €118.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Heijmans would likely require a major re-capitalisation if it had to pay its creditors today. Given that Heijmans has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.
We note that Heijmans grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Heijmans'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. Heijmans 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. Happily for any shareholders, Heijmans actually produced more free cash flow than EBIT over the last three years. 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 Heijmans does have more liabilities than liquid assets, it also has net cash of €56.1m. And it impressed us with free cash flow of €31m, being 104% of its EBIT. So we don't have any problem with Heijmans's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Heijmans , and understanding them should be part of your investment process.
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.
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.
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