Some say that volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett once said that “volatility is far from synonymous with risk.” So it may be obvious that you need to factor in debt when you consider how risky a particular stock is, as too much debt can sink a company. important, BBI Burgerliches Brauhaus Immobilien AG (FRA:BBIA) does bear debt. But is this debt a concern for shareholders?
What risk does debt entail?
Debt and other obligations become risky for a company when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An essential part of capitalism is the process of ‘creative destruction’, in which failed companies are mercilessly liquidated by their bankers. While not too common, we often see indebted companies permanently diluting their shareholders as lenders force them to raise capital at a difficult price. Debt can, of course, be an important tool in companies, especially in wealthy companies. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.
What is the net debt of BBI Bürgerliches Brauhaus Immobilien?
The image below, which you can click on for more details, shows that BBI Bürgerliches Brauhaus Immobilien had a debt of €94.5 million at the end of December 2020, a reduction of €98.5 million over one year. However, it does have €6.31 million in cash to offset this, leading to a net debt of approximately €88.1 million.
How strong is the balance sheet of BBI Bürgerliches Brauhaus Immobilien?
The most recent balance sheet shows that BBI Bürgerliches Brauhaus Immobilien had debts of €17.1 million that fell due within one year, and liabilities of €91.5 million that had to be paid afterwards. This was offset by €6.31 million in cash and €270.2k in receivables to be paid within 12 months. It therefore has liabilities totaling €102.0 million more than its cash and short-term receivables combined.
This shortfall is significant relative to the market cap of €130.0 million, so it suggests that shareholders should watch the use of debt from BBI Bürgerliches Brauhaus Immobilien. If its lenders require it to support the balance sheet, shareholders would likely face severe dilution.
To upgrade a company’s debt relative to revenue, we calculate net debt divided by revenue before interest, taxes, depreciation, and amortization (EBITDA) and revenue before interest and tax (EBIT) divided by interest expense (are interest coverage). So we consider debt in relation to earnings, both with and without depreciation and amortization costs.
With a net debt/EBITDA ratio of 6.6, it is fair to say that BBI Bürgerliches Brauhaus Immobilien has a significant amount of debt. However, the interest coverage of 3.8 is quite strong, which is a good sign. The good news is that BBI Bürgerliches Brauhaus Immobilien has improved its EBIT by 6.1% over the past twelve months, gradually reducing its debt-to-profit ratio. There is no doubt that we learn the most about debt from the balance sheet. But you can’t see debt completely isolated; since BBI Bürgerliches Brauhaus Immobilien needs income to repay that debt. So when considering debt, it’s definitely worth looking at earnings performance. Click here for an interactive snapshot.
Finally, while the tax man loves accounting profits, lenders only accept cold hard cash. So we need to see clearly whether that EBIT leads to a corresponding free cash flow. Over the past three years, BBI Bürgerliches Brauhaus Immobilien has posted free cash flow equivalent to a staggering 85% of its EBIT, which is stronger than we would usually expect. That puts it in a very strong position to pay off debt.
Neither BBI Bürgerliches Brauhaus Immobilien’s ability to service its debts, based on its EBITDA, nor the level of total liabilities gave us confidence in its ability to take on more debt. But the good news is that it seems to convert EBIT into free cash flow with ease. We think that the debt of BBI Bürgerliches Brauhaus Immobilien makes it a bit risky, after looking at the aforementioned data points together. That’s not necessarily a bad thing, as leverage can increase returns on equity, but it’s something to keep in mind. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside within the balance sheet – far from it. These risks can be difficult to spot. Every company has them, and we’ve seen them 1 warning sign for BBI Bürgerliches Brauhaus Immobilien you should know.
If you are the type of investor who prefers to buy stocks without debt, don’t hesitate to discover our exclusive list of net cash growth stocks, today.
When trading stocks or other investments, use the platform considered by many to be the professional gateway to the global market, Interactive brokers. Get the cheapest* trade in stocks, options, futures, forex, bonds and funds worldwide from one integrated account.
This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell stocks and does not take into account your objectives or your financial situation. We strive to provide you with long-term focused analysis powered by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no position in said stocks.
*Interactive Brokers Rated as Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Do you have any feedback on this article? Concerned about the content? Contact us directly with us. You can also email the editorial team at (at) Simplywallst.com.