Does InCity Immobilien (ETR:IC8) Have A Healthy Balance Sheet?

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 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 InCity Immobilien AG (ETR:IC8) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 InCity Immobilien

What Is InCity Immobilien's Net Debt?

As you can see below, InCity Immobilien had €70.0m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has €6.20m in cash leading to net debt of about €63.8m.

A Look At InCity Immobilien's Liabilities

We can see from the most recent balance sheet that InCity Immobilien had liabilities of €25.0m falling due within a year, and liabilities of €55.9m due beyond that. Offsetting these obligations, it had cash of €6.20m as well as receivables valued at €2.44m due within 12 months. So its liabilities total €72.3m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's €51.6m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since InCity Immobilien will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year InCity Immobilien wasn't profitable at an EBIT level, but managed to grow its revenue by 380%, to €37m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, InCity Immobilien still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable €6.0m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through €2.1m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that InCity Immobilien is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.