Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien (ETR:BVB) Has A Somewhat Strained Balance Sheet

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. We note that Borussia Dortmund GmbH & Co. Kommanditgesellschaft auf Aktien (ETR:BVB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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, 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.

View our latest analysis for Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien

What Is Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien had debt of €46.4m, up from €2.80m in one year. However, because it has a cash reserve of €1.74m, its net debt is less, at about €44.7m.

A Look At Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's Liabilities

The latest balance sheet data shows that Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien had liabilities of €222.4m due within a year, and liabilities of €68.9m falling due after that. Offsetting this, it had €1.74m in cash and €98.4m in receivables that were due within 12 months. So it has liabilities totalling €191.1m more than its cash and near-term receivables, combined.

Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien has a market capitalization of €408.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien has net debt of just 0.35 times EBITDA, suggesting it could ramp leverage without breaking a sweat. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. It was also good to see that despite losing money on the EBIT line last year, Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien turned things around in the last 12 months, delivering and EBIT of €33m. 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 Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien 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, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

While Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's conversion of EBIT to free cash flow has us nervous. To wit both its interest cover and net debt to EBITDA were encouraging signs. Looking at all the angles mentioned above, it does seem to us that Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.