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. Importantly, EMCOR Group, Inc. (NYSE:EME) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for EMCOR Group

What Is EMCOR Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that EMCOR Group had US$254.1m of debt in June 2022, down from US$267.0m, one year before. But on the other hand it also has US$262.4m in cash, leading to a US$8.24m net cash position.

A Look At EMCOR Group's Liabilities

Zooming in on the latest balance sheet data, we can see that EMCOR Group had liabilities of US$2.40b due within 12 months and liabilities of US$790.7m due beyond that. On the other hand, it had cash of US$262.4m and US$2.72b worth of receivables due within a year. So its liabilities total US$211.1m more than the combination of its cash and short-term receivables.

Since publicly traded EMCOR Group shares are worth a total of US$5.67b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, EMCOR Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

While EMCOR Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, EMCOR Group generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about EMCOR Group's liabilities, but we can be reassured by the fact it has has net cash of US$8.24m. And it impressed us with free cash flow of US$260m, being 90% of its EBIT. So we don't think EMCOR Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with EMCOR Group , and understanding them should be part of your investment process.

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.

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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.