Does PATRIZIA (ETR:PAT) Have A Healthy 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 PATRIZIA SE (ETR:PAT) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for PATRIZIA

How Much Debt Does PATRIZIA Carry?

As you can see below, PATRIZIA had €175.4m of debt at September 2022, down from €280.1m a year prior. However, it does have €426.2m in cash offsetting this, leading to net cash of €250.8m.

A Look At PATRIZIA's Liabilities

The latest balance sheet data shows that PATRIZIA had liabilities of €151.2m due within a year, and liabilities of €474.0m falling due after that. Offsetting these obligations, it had cash of €426.2m as well as receivables valued at €217.8m due within 12 months. So it can boast €18.8m more liquid assets than total liabilities.

This surplus suggests that PATRIZIA has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that PATRIZIA has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that PATRIZIA's EBIT was down 65% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 PATRIZIA 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. PATRIZIA may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, PATRIZIA 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 it is always sensible to investigate a company's debt, in this case PATRIZIA has €250.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 144% of that EBIT to free cash flow, bringing in €88m. So we are not troubled with PATRIZIA's debt use. 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. For instance, we've identified 2 warning signs for PATRIZIA that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.