Deutsche Real Estate (FRA:DRE2) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Deutsche Real Estate AG (FRA:DRE2) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Deutsche Real Estate

What Is Deutsche Real Estate's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Deutsche Real Estate had debt of €42.0m, up from €12.9m in one year. But it also has €64.3m in cash to offset that, meaning it has €22.2m net cash.

How Strong Is Deutsche Real Estate's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Deutsche Real Estate had liabilities of €4.62m due within 12 months and liabilities of €110.9m due beyond that. Offsetting this, it had €64.3m in cash and €2.71m in receivables that were due within 12 months. So it has liabilities totalling €48.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Deutsche Real Estate has a market capitalization of €163.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Deutsche Real Estate boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Deutsche Real Estate has increased its EBIT by 8.1% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Deutsche Real Estate's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Deutsche Real Estate has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Deutsche Real Estate recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Deutsche Real Estate's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €22.2m. And it also grew its EBIT by 8.1% over the last year. So we don't have any problem with Deutsche Real Estate's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Deutsche Real Estate that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.