Scout24 (ETR:G24) Could Easily Take On More Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Scout24 SE (ETR:G24) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out our latest analysis for Scout24

What Is Scout24's Debt?

The image below, which you can click on for greater detail, shows that Scout24 had debt of €212.1m at the end of June 2021, a reduction from €261.7m over a year. However, its balance sheet shows it holds €679.3m in cash, so it actually has €467.1m net cash.

How Healthy Is Scout24's Balance Sheet?

According to the last reported balance sheet, Scout24 had liabilities of €132.0m due within 12 months, and liabilities of €512.5m due beyond 12 months. Offsetting this, it had €679.3m in cash and €27.8m in receivables that were due within 12 months. So it can boast €62.6m more liquid assets than total liabilities.

This state of affairs indicates that Scout24's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €5.27b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Scout24 has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Scout24 grew its EBIT by 12% last year, making its debt load easier to handle. 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 Scout24 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. While Scout24 has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Scout24 actually produced more free cash flow than EBIT over the last three years. 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 Scout24 has €467.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €71m, being 112% of its EBIT. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Scout24 that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

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