Allreal Holding (VTX:ALLN) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Allreal Holding AG (VTX:ALLN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Allreal Holding

How Much Debt Does Allreal Holding Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Allreal Holding had CHF2.18b of debt, an increase on CHF2.00b, over one year. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Allreal Holding's Balance Sheet?

We can see from the most recent balance sheet that Allreal Holding had liabilities of CHF691.0m falling due within a year, and liabilities of CHF1.88b due beyond that. Offsetting these obligations, it had cash of CHF40.5m as well as receivables valued at CHF63.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF2.47b.

This is a mountain of leverage relative to its market capitalization of CHF2.94b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

As it happens Allreal Holding has a fairly concerning net debt to EBITDA ratio of 12.5 but very strong interest coverage of 10.6. So either it has access to very cheap long term debt or that interest expense is going to grow! Sadly, Allreal Holding's EBIT actually dropped 9.5% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Allreal Holding'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Allreal Holding recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

Allreal Holding's struggle handle its debt, based on its EBITDA, had us second guessing its balance sheet strength, but the other data-points we considered were relatively redeeming. For example its interest cover was refreshing. Taking the abovementioned factors together we do think Allreal Holding's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Allreal Holding (including 2 which don'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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