Is PATRIZIA (ETR:PAT) Using Too Much 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies PATRIZIA SE (ETR:PAT) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for PATRIZIA

What Is PATRIZIA's Debt?

As you can see below, at the end of June 2023, PATRIZIA had €278.6m of debt, up from €175.3m a year ago. Click the image for more detail. But it also has €377.7m in cash to offset that, meaning it has €99.1m net cash.

How Healthy Is PATRIZIA's Balance Sheet?

We can see from the most recent balance sheet that PATRIZIA had liabilities of €357.0m falling due within a year, and liabilities of €362.0m due beyond that. Offsetting this, it had €377.7m in cash and €147.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €194.3m.

This deficit isn't so bad because PATRIZIA is worth €629.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, PATRIZIA also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 PATRIZIA'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.

In the last year PATRIZIA had a loss before interest and tax, and actually shrunk its revenue by 5.3%, to €319m. That's not what we would hope to see.

So How Risky Is PATRIZIA?

While PATRIZIA lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €83m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For example - PATRIZIA has 2 warning signs we think you should be aware of.

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.