Health Check: How Prudently Does DEMIRE Deutsche Mittelstand Real Estate (ETR:DMRE) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies DEMIRE Deutsche Mittelstand Real Estate AG (ETR:DMRE) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for DEMIRE Deutsche Mittelstand Real Estate

What Is DEMIRE Deutsche Mittelstand Real Estate's Debt?

As you can see below, DEMIRE Deutsche Mittelstand Real Estate had €828.9m of debt at March 2023, down from €891.0m a year prior. On the flip side, it has €73.4m in cash leading to net debt of about €755.5m.

How Strong Is DEMIRE Deutsche Mittelstand Real Estate's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DEMIRE Deutsche Mittelstand Real Estate had liabilities of €62.5m due within 12 months and liabilities of €993.2m due beyond that. Offsetting these obligations, it had cash of €73.4m as well as receivables valued at €17.3m due within 12 months. So its liabilities total €965.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €174.1m 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 definitely think shareholders need to watch this one closely. After all, DEMIRE Deutsche Mittelstand 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 it is future earnings, more than anything, that will determine DEMIRE Deutsche Mittelstand Real Estate's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year DEMIRE Deutsche Mittelstand Real Estate had a loss before interest and tax, and actually shrunk its revenue by 72%, to €59m. To be frank that doesn't bode well.

Caveat Emptor

While DEMIRE Deutsche Mittelstand Real Estate's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable €34m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost €91m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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. Be aware that DEMIRE Deutsche Mittelstand Real Estate is showing 1 warning sign in our investment analysis , you should know about...

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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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.