Is UBM Development (VIE:UBS) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that UBM Development AG (VIE:UBS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 UBM Development

What Is UBM Development's Net Debt?

As you can see below, at the end of September 2020, UBM Development had €738.8m of debt, up from €590.9m a year ago. Click the image for more detail. On the flip side, it has €266.1m in cash leading to net debt of about €472.7m.

How Healthy Is UBM Development's Balance Sheet?

We can see from the most recent balance sheet that UBM Development had liabilities of €200.9m falling due within a year, and liabilities of €710.8m due beyond that. On the other hand, it had cash of €266.1m and €104.8m worth of receivables due within a year. So it has liabilities totalling €540.8m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €282.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, UBM Development would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if UBM Development can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, UBM Development made a loss at the EBIT level, and saw its revenue drop to €186m, which is a fall of 26%. That makes us nervous, to say the least.

Caveat Emptor

While UBM Development's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €2.2m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through €111m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that UBM Development is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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