DEMIRE Deutsche Mittelstand Real Estate (ETR:DMRE) Has A Somewhat Strained Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 DEMIRE Deutsche Mittelstand Real Estate AG (ETR:DMRE) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for DEMIRE Deutsche Mittelstand Real Estate

What Is DEMIRE Deutsche Mittelstand Real Estate's Net Debt?

As you can see below, DEMIRE Deutsche Mittelstand Real Estate had €886.3m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have €95.6m in cash offsetting this, leading to net debt of about €790.7m.

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

We can see from the most recent balance sheet that DEMIRE Deutsche Mittelstand Real Estate had liabilities of €49.3m falling due within a year, and liabilities of €1.07b due beyond that. Offsetting this, it had €95.6m in cash and €21.1m in receivables that were due within 12 months. So it has liabilities totalling €997.7m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €263.8m 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

DEMIRE Deutsche Mittelstand Real Estate has a rather high debt to EBITDA ratio of 14.1 which suggests a meaningful debt load. But the good news is that it boasts fairly comforting interest cover of 4.9 times, suggesting it can responsibly service its obligations. We saw DEMIRE Deutsche Mittelstand Real Estate grow its EBIT by 5.7% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if DEMIRE Deutsche Mittelstand Real Estate can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Considering the last three years, DEMIRE Deutsche Mittelstand Real Estate actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

On the face of it, DEMIRE Deutsche Mittelstand Real Estate's net debt to EBITDA left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least its EBIT growth rate is not so bad. After considering the datapoints discussed, we think DEMIRE Deutsche Mittelstand Real Estate has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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 DEMIRE Deutsche Mittelstand Real Estate is showing 5 warning signs in our investment analysis , and 2 of those don't sit too well with us...

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.