Does Deutsche Real Estate (FRA:DRE2) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Deutsche Real Estate AG (FRA:DRE2) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Deutsche Real Estate

What Is Deutsche Real Estate's Net Debt?

As you can see below, Deutsche Real Estate had €12.9m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has €36.6m in cash to offset that, meaning it has €23.7m net cash.

A Look At Deutsche Real Estate's Liabilities

The latest balance sheet data shows that Deutsche Real Estate had liabilities of €3.48m due within a year, and liabilities of €90.8m falling due after that. Offsetting this, it had €36.6m in cash and €2.10m in receivables that were due within 12 months. So it has liabilities totalling €55.6m 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 €205.8m, 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. While it does have liabilities worth noting, Deutsche Real Estate also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Deutsche Real Estate grew its EBIT by 16% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Deutsche Real Estate's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Deutsche Real Estate may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Deutsche Real Estate produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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 €23.7m. And it impressed us with its EBIT growth of 16% over the last year. So we don't have any problem with Deutsche Real Estate's use of 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Deutsche Real Estate 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.