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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Monadelphous Group Limited (ASX:MND) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Monadelphous Group

What Is Monadelphous Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Monadelphous Group had AU$8.63m of debt in December 2024, down from AU$13.7m, one year before. But on the other hand it also has AU$272.5m in cash, leading to a AU$263.9m net cash position.

A Look At Monadelphous Group's Liabilities

The latest balance sheet data shows that Monadelphous Group had liabilities of AU$323.9m due within a year, and liabilities of AU$66.4m falling due after that. Offsetting this, it had AU$272.5m in cash and AU$298.9m in receivables that were due within 12 months. So it can boast AU$181.1m more liquid assets than total liabilities.

This surplus suggests that Monadelphous Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Monadelphous Group has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Monadelphous Group grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Monadelphous Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Monadelphous 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. Happily for any shareholders, Monadelphous Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Monadelphous Group has net cash of AU$263.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of AU$80m, being 122% of its EBIT. So is Monadelphous Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Monadelphous Group , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.