Scout24 (ETR:G24) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Scout24 AG (ETR:G24) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Scout24

What Is Scout24's Debt?

You can click the graphic below for the historical numbers, but it shows that Scout24 had €263.8m of debt in December 2020, down from €831.9m, one year before. But it also has €1.74b in cash to offset that, meaning it has €1.47b net cash.

A Look At Scout24's Liabilities

According to the last reported balance sheet, Scout24 had liabilities of €142.6m due within 12 months, and liabilities of €564.0m due beyond 12 months. Offsetting this, it had €1.74b in cash and €26.7m in receivables that were due within 12 months. So it actually has €1.06b more liquid assets than total liabilities.

This excess liquidity suggests that Scout24 is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Scout24 has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Scout24 has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Scout24 has net cash of €1.47b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €47m, being 112% of its EBIT. So is Scout24's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Scout24's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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