Does ACCENTRO Real Estate (ETR:A4Y) Have A Healthy 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies ACCENTRO Real Estate AG (ETR:A4Y) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ACCENTRO Real Estate

How Much Debt Does ACCENTRO Real Estate Carry?

You can click the graphic below for the historical numbers, but it shows that ACCENTRO Real Estate had €501.0m of debt in June 2023, down from €594.3m, one year before. On the flip side, it has €38.1m in cash leading to net debt of about €462.9m.

How Healthy Is ACCENTRO Real Estate's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ACCENTRO Real Estate had liabilities of €229.9m due within 12 months and liabilities of €333.6m due beyond that. Offsetting this, it had €38.1m in cash and €71.1m in receivables that were due within 12 months. So it has liabilities totalling €454.3m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €50.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, ACCENTRO Real Estate would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ACCENTRO Real Estate 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.

Over 12 months, ACCENTRO Real Estate made a loss at the EBIT level, and saw its revenue drop to €108m, which is a fall of 49%. That makes us nervous, to say the least.

Caveat Emptor

Not only did ACCENTRO Real Estate's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €8.3m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost €37m in the last year. So we think buying this stock is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with ACCENTRO Real Estate (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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.