Here's Why DEMIRE Deutsche Mittelstand Real Estate (ETR:DMRE) Has A Meaningful Debt Burden

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, DEMIRE Deutsche Mittelstand Real Estate AG (ETR:DMRE) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for DEMIRE Deutsche Mittelstand Real Estate

What Is DEMIRE Deutsche Mittelstand Real Estate's Net Debt?

As you can see below, DEMIRE Deutsche Mittelstand Real Estate had €816.9m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have €120.0m in cash offsetting this, leading to net debt of about €696.9m.

A Look At DEMIRE Deutsche Mittelstand Real Estate's Liabilities

The latest balance sheet data shows that DEMIRE Deutsche Mittelstand Real Estate had liabilities of €714.3m due within a year, and liabilities of €279.9m falling due after that. Offsetting these obligations, it had cash of €120.0m as well as receivables valued at €17.7m due within 12 months. So it has liabilities totalling €856.5m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €100.8m 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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

As it happens DEMIRE Deutsche Mittelstand Real Estate has a fairly concerning net debt to EBITDA ratio of 165 but very strong interest coverage of 1k. So either it has access to very cheap long term debt or that interest expense is going to grow! We also note that DEMIRE Deutsche Mittelstand Real Estate improved its EBIT from a last year's loss to a positive €3.2m. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Happily for any shareholders, DEMIRE Deutsche Mittelstand Real Estate actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

On the face of it, DEMIRE Deutsche Mittelstand Real Estate's net debt to EBITDA left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its interest cover is a good sign, and makes us more optimistic. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making DEMIRE Deutsche Mittelstand Real Estate stock a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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 example DEMIRE Deutsche Mittelstand Real Estate has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com