MasTec (NYSE: MTZ) has a pretty healthy track record

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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, MasTec, Inc. (NYSE: MTZ) is in debt. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

What is MasTec’s debt?

You can click on the graph below for the historical figures, but it shows that as of June 2021, MasTec had a debt of US $ 1.27 billion, an increase from US $ 956.0 million, over a year. However, he also had $ 237.3 million in cash, so his net debt is $ 1.03 billion.

NYSE: MTZ Debt to Equity History October 18, 2021

A look at MasTec’s responsibilities

According to the latest published balance sheet, MasTec had liabilities of US $ 1.64 billion due within 12 months and liabilities of US $ 2.10 billion due beyond 12 months. In return, he had $ 237.3 million in cash and $ 1.97 billion in receivables due within 12 months. Its liabilities therefore total $ 1.53 billion more than the combination of its cash and short-term receivables.

While that might sound like a lot, it’s not that bad since MasTec has a market cap of US $ 6.25 billion, and could therefore likely strengthen its balance sheet by raising capital if needed. But we absolutely want to keep our eyes open for indications that its debt is too risky.

We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

With net debt of just 1.2 times EBITDA, MasTec is arguably fairly cautious. And this view is supported by the strong interest coverage, with EBIT reaching 9.4 times last year’s interest expense. And we also warmly note that MasTec increased its EBIT by 13% last year, which makes its debt more manageable. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine MasTec’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a business can only pay off its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, MasTec has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.

Our point of view

MasTec’s conversion of EBIT to free cash flow suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And that’s just the start of the good news since its coverage of interest is also very encouraging. When you zoom out, MasTec seems to be using the debt quite reasonably; and that gets the nod from us. While debt comes with risk, when used wisely, it can also generate a higher return on equity. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. To do this, you need to know the 1 warning sign we spotted with MasTec.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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