Yahoo Finance Morgan Sindall Group (LON:MGNS) Could Easily Take On More Debt
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Morgan Sindall Group plc (LON:MGNS) 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. 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, 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 Morgan Sindall Group
What Is Morgan Sindall Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2021 Morgan Sindall Group had UK£110.6m of debt, an increase on UK£67.7m, over one year. However, its balance sheet shows it holds UK£468.6m in cash, so it actually has UK£358.0m net cash.
How Healthy Is Morgan Sindall Group's Balance Sheet?
According to the last reported balance sheet, Morgan Sindall Group had liabilities of UK£1.13b due within 12 months, and liabilities of UK£106.5m due beyond 12 months. Offsetting these obligations, it had cash of UK£468.6m as well as receivables valued at UK£553.9m due within 12 months. So it has liabilities totalling UK£210.9m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Morgan Sindall Group has a market capitalization of UK£942.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Morgan Sindall Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that Morgan Sindall Group grew its EBIT by 106% over twelve months. That boost will make it even 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 Morgan Sindall Group'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Morgan Sindall Group 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. Happily for any shareholders, Morgan Sindall Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While Morgan Sindall Group does have more liabilities than liquid assets, it also has net cash of UK£358.0m. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in UK£103m. So is Morgan Sindall Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Morgan Sindall Group that you should be aware of.
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.
