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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Scout24 SE (ETR:G24) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Scout24
What Is Scout24's Debt?
You can click the graphic below for the historical numbers, but it shows that Scout24 had €73.0m of debt in June 2022, down from €212.1m, one year before. However, it does have €228.0m in cash offsetting this, leading to net cash of €155.0m.
A Look At Scout24's Liabilities
Zooming in on the latest balance sheet data, we can see that Scout24 had liabilities of €117.2m due within 12 months and liabilities of €375.2m due beyond that. Offsetting this, it had €228.0m in cash and €33.6m in receivables that were due within 12 months. So its liabilities total €230.9m more than the combination of its cash and short-term receivables.
Given Scout24 has a market capitalization of €4.33b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Scout24 also has more cash than debt, so we're pretty confident it can manage its debt safely.
Fortunately, Scout24 grew its EBIT by 9.0% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Scout24'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. Scout24 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. During the last three years, Scout24 produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
We could understand if investors are concerned about Scout24's liabilities, but we can be reassured by the fact it has has net cash of €155.0m. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in €127m. So we don't think Scout24's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Scout24 has 1 warning sign we think you should be aware of.
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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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.
About XTRA:G24
Scout24
Operates ImmoScout24, a digital platform for the residential and commercial real estate sectors in Germany and internationally.
Adequate balance sheet and slightly overvalued.