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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Costain Group PLC (LON:COST) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Costain Group
How Much Debt Does Costain Group Carry?
You can click the graphic below for the historical numbers, but it shows that Costain Group had UK£35.8m of debt in June 2022, down from UK£43.0m, one year before. But it also has UK£131.9m in cash to offset that, meaning it has UK£96.1m net cash.
A Look At Costain Group's Liabilities
The latest balance sheet data shows that Costain Group had liabilities of UK£253.1m due within a year, and liabilities of UK£49.6m falling due after that. Offsetting these obligations, it had cash of UK£131.9m as well as receivables valued at UK£203.1m due within 12 months. So it can boast UK£32.3m more liquid assets than total liabilities.
It's good to see that Costain Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Costain Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Costain Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Costain Group wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to UK£1.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Costain Group?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Costain Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through UK£9.5m of cash and made a loss of UK£6.2m. With only UK£96.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 1 warning sign for Costain Group you should be aware of.