Is DEMIRE Deutsche Mittelstand Real Estate (ETR:DMRE) Using Debt In A Risky Way?

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. We can see that DEMIRE Deutsche Mittelstand Real Estate AG (ETR:DMRE) does use debt in its business. But is this debt a concern to shareholders?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

View 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 €797.1m of debt at September 2023, down from €886.3m a year prior. On the flip side, it has €132.3m in cash leading to net debt of about €664.8m.

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

The latest balance sheet data shows that DEMIRE Deutsche Mittelstand Real Estate had liabilities of €184.3m due within a year, and liabilities of €816.2m falling due after that. Offsetting this, it had €132.3m in cash and €17.7m in receivables that were due within 12 months. So its liabilities total €850.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €111.8m 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. At the end of the day, DEMIRE Deutsche Mittelstand Real Estate would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, DEMIRE Deutsche Mittelstand Real Estate made a loss at the EBIT level, and saw its revenue drop to €122m, which is a fall of 23%. 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. Its EBIT loss was a whopping €52m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost €133m in the last year. So we think buying this stock 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 example, we've discovered 2 warning signs for DEMIRE Deutsche Mittelstand Real Estate (1 is potentially serious!) that you should be aware of before investing here.

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.