Is EMCOR Group (NYSE:EME) A Risky Investment?

Simply Wall St
·4 min read

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that EMCOR Group, Inc. (NYSE:EME) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for EMCOR Group

What Is EMCOR Group's Net Debt?

As you can see below, EMCOR Group had US$267.0m of debt at June 2021, down from US$295.5m a year prior. However, its balance sheet shows it holds US$668.9m in cash, so it actually has US$401.9m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is EMCOR Group's Balance Sheet?

According to the last reported balance sheet, EMCOR Group had liabilities of US$2.14b due within 12 months, and liabilities of US$898.9m due beyond 12 months. Offsetting these obligations, it had cash of US$668.9m as well as receivables valued at US$2.33b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that EMCOR Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$6.45b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, EMCOR Group boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that EMCOR Group grew its EBIT by 15% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine EMCOR Group'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While EMCOR 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. Over the last three years, EMCOR Group recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that EMCOR Group has US$401.9m in net cash. And it impressed us with free cash flow of US$484m, being 92% of its EBIT. So is EMCOR Group's debt a risk? It doesn't seem so to us. We'd be very excited to see if EMCOR Group 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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 (at) simplywallst.com.

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