We Think Grafton Group (LON:GFTU) Can Stay On Top Of Its Debt
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Grafton Group plc (LON:GFTU) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Grafton Group Carry?
The image below, which you can click on for greater detail, shows that at June 2025 Grafton Group had debt of UK£248.7m, up from UK£192.3m in one year. But on the other hand it also has UK£494.5m in cash, leading to a UK£245.8m net cash position.
How Healthy Is Grafton Group's Balance Sheet?
The latest balance sheet data shows that Grafton Group had liabilities of UK£661.0m due within a year, and liabilities of UK£596.6m falling due after that. Offsetting this, it had UK£494.5m in cash and UK£376.5m in receivables that were due within 12 months. So it has liabilities totalling UK£386.6m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Grafton Group has a market capitalization of UK£1.73b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Grafton Group boasts net cash, so it's fair to say it does not have a heavy debt load!
View our latest analysis for Grafton Group
While Grafton Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Grafton 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Grafton 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, Grafton Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While Grafton Group does have more liabilities than liquid assets, it also has net cash of UK£245.8m. And it impressed us with free cash flow of UK£186m, being 111% of its EBIT. So is Grafton Group's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that Grafton Group insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.