DEMIRE Deutsche Mittelstand Real Estate (ETR:DMRE) Seems To Be Using A Lot Of Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, DEMIRE Deutsche Mittelstand Real Estate AG (ETR:DMRE) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

As you can see below, DEMIRE Deutsche Mittelstand Real Estate had €829.7m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have €101.6m in cash offsetting this, leading to net debt of about €728.1m.

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

Zooming in on the latest balance sheet data, we can see that DEMIRE Deutsche Mittelstand Real Estate had liabilities of €40.0m due within 12 months and liabilities of €987.2m due beyond that. Offsetting these obligations, it had cash of €101.6m as well as receivables valued at €41.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €884.1m.

This deficit casts a shadow over the €510.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, DEMIRE Deutsche Mittelstand Real Estate would likely require a major re-capitalisation if it had to pay its creditors today.

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).

With a net debt to EBITDA ratio of 13.4, it's fair to say DEMIRE Deutsche Mittelstand Real Estate does have a significant amount of debt. But the good news is that it boasts fairly comforting interest cover of 3.8 times, suggesting it can responsibly service its obligations. Worse, DEMIRE Deutsche Mittelstand Real Estate's EBIT was down 22% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. Looking at the most recent three years, DEMIRE Deutsche Mittelstand Real Estate recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

To be frank both DEMIRE Deutsche Mittelstand Real Estate's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least its conversion of EBIT to free cash flow is not so bad. Taking into account all the aforementioned factors, it looks like DEMIRE Deutsche Mittelstand Real Estate has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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 example DEMIRE Deutsche Mittelstand Real Estate has 4 warning signs (and 2 which shouldn't be ignored) we think 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. 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.
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