Here’s why Fluor (NYSE: FLR) has a significant debt burden

Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. When we think about the risk level of a business, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Fluor Corporation (NYSE: FLR) makes use of debt. But should shareholders be concerned about its use of debt?

When is debt a problem?

Generally speaking, debt only becomes a real problem when a business cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting shareholders because lenders are forcing them to raise capital at a difficult price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Discover our latest analyzes for fluorine

What is Fluor’s debt?

As you can see below, Fluor had $ 1.74 billion in debt as of December 2020, which is roughly the same as the year before. You can click on the graph for more details. However, it has US $ 2.22 billion in cash, which translates into a net cash position of US $ 486.7 million.

NYSE: FLR Debt / Equity History March 11, 2021

A look at Fluor’s responsibilities

According to the latest published balance sheet, Fluor had liabilities of US $ 3.57 billion due within 12 months and liabilities of US $ 2.47 billion beyond 12 months. On the other hand, it had US $ 2.22 billion in cash and US $ 2.15 billion in receivables due within one year. Its liabilities therefore exceed the sum of its cash and its (short-term) receivables by US $ 1.68 billion.

Fluor has a market capitalization of US $ 2.81 billion, so it could most likely raise cash to improve its balance sheet, should the need arise. But it is clear that we absolutely need to take a close look at whether it can manage its debt without dilution. Despite his notable liabilities, Fluor has a net cash flow, so it’s fair to say that he doesn’t have a heavy debt!

Notably, Fluor recorded an EBIT loss last year, but improved this result to a positive EBIT of US $ 145 million over the past twelve months. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Fluor can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.

But our last consideration is also important, because a business cannot pay its debt with profits on paper; he needs cash. While Fluor has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building (or erodes) that cash balance. . Over the past year, Fluor’s free cash flow has been 50% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.

To summarize

Although Fluor has more liabilities than liquid assets, it also has net cash of US $ 486.7 million. So while Fluor doesn’t have a good track record, it’s certainly not that bad. Even though Fluor lost money on the bottom line, its positive EBIT suggests the business itself has potential. Then you may want to check the evolution of income in recent years.

If, after all of this, 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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