Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Sterling Infrastructure, Inc. (NASDAQ:STRL) makes use of debt. But the real question is whether this debt is making the company risky.
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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Sterling Infrastructure Carry?
You can click the graphic below for the historical numbers, but it shows that Sterling Infrastructure had US$334.6m of debt in March 2024, down from US$400.4m, one year before. However, its balance sheet shows it holds US$480.4m in cash, so it actually has US$145.9m net cash.
How Healthy Is Sterling Infrastructure's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Sterling Infrastructure had liabilities of US$705.7m due within 12 months and liabilities of US$459.6m due beyond that. Offsetting these obligations, it had cash of US$480.4m as well as receivables valued at US$380.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$304.3m.
Since publicly traded Sterling Infrastructure shares are worth a total of US$3.24b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sterling Infrastructure boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Sterling Infrastructure has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. 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 Sterling Infrastructure'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sterling Infrastructure 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. Over the last three years, Sterling Infrastructure actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Sterling Infrastructure has US$145.9m in net cash. The cherry on top was that in converted 138% of that EBIT to free cash flow, bringing in US$407m. So is Sterling Infrastructure's debt a risk? It doesn't seem so to us. We'd be very excited to see if Sterling Infrastructure insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com