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.' 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 can see that Fluor Corporation (NYSE:FLR) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Fluor's Net Debt?
The image below, which you can click on for greater detail, shows that Fluor had debt of US$1.16b at the end of June 2022, a reduction from US$1.68b over a year. But on the other hand it also has US$2.19b in cash, leading to a US$1.03b net cash position.
A Look At Fluor's Liabilities
The latest balance sheet data shows that Fluor had liabilities of US$3.13b due within a year, and liabilities of US$1.71b falling due after that. Offsetting these obligations, it had cash of US$2.19b as well as receivables valued at US$2.04b due within 12 months. So it has liabilities totalling US$597.0m more than its cash and near-term receivables, combined.
Of course, Fluor has a market capitalization of US$4.05b, 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, Fluor boasts net cash, so it's fair to say it does not have a heavy debt load!
We saw Fluor grow its EBIT by 4.1% in the last twelve months. Whilst that hardly knocks our socks off it is a positive when it comes to debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fluor 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fluor 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 three years, Fluor recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
Summing Up
Although Fluor's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.03b. And it also grew its EBIT by 4.1% over the last year. So we are not troubled with Fluor's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Fluor insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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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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.
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