Is Züblin Immobilien Holding (VTX:ZUBN) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Züblin Immobilien Holding AG (VTX:ZUBN) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Züblin Immobilien Holding

What Is Züblin Immobilien Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Züblin Immobilien Holding had CHF68.9m of debt in September 2020, down from CHF72.8m, one year before. However, it does have CHF1.90m in cash offsetting this, leading to net debt of about CHF67.0m.

How Healthy Is Züblin Immobilien Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Züblin Immobilien Holding had liabilities of CHF6.90m due within 12 months and liabilities of CHF83.4m due beyond that. Offsetting these obligations, it had cash of CHF1.90m as well as receivables valued at CHF72.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF88.3m.

When you consider that this deficiency exceeds the company's CHF83.6m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While Züblin Immobilien Holding's debt to EBITDA ratio of 11.2 suggests a heavy debt load, its interest coverage of 8.0 implies it services that debt with ease. Overall we'd say it seems likely the company is carrying a fairly heavy swag of debt. It is well worth noting that Züblin Immobilien Holding's EBIT shot up like bamboo after rain, gaining 64% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Züblin Immobilien Holding will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Züblin Immobilien Holding actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Züblin Immobilien Holding's net debt to EBITDA was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its conversion of EBIT to free cash flow. Considering this range of data points, we think Züblin Immobilien Holding is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 5 warning signs for Züblin Immobilien Holding (of which 1 is a bit concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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