These 4 Measures Indicate That TTL Beteiligungs- und Grundbesitz-AG (ETR:TTO) Is Using Debt Extensively

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that TTL Beteiligungs- und Grundbesitz-AG (ETR:TTO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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. 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.

View our latest analysis for TTL Beteiligungs- und Grundbesitz-AG

What Is TTL Beteiligungs- und Grundbesitz-AG's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 TTL Beteiligungs- und Grundbesitz-AG had €81.9m of debt, an increase on €54.9m, over one year. However, it also had €6.48m in cash, and so its net debt is €75.4m.

How Strong Is TTL Beteiligungs- und Grundbesitz-AG's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TTL Beteiligungs- und Grundbesitz-AG had liabilities of €1.42m due within 12 months and liabilities of €81.9m due beyond that. Offsetting this, it had €6.48m in cash and €4.05m in receivables that were due within 12 months. So it has liabilities totalling €72.8m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €67.4m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

As it happens TTL Beteiligungs- und Grundbesitz-AG has a fairly concerning net debt to EBITDA ratio of 64.4 but very strong interest coverage of 1k. So either it has access to very cheap long term debt or that interest expense is going to grow! Notably, TTL Beteiligungs- und Grundbesitz-AG made a loss at the EBIT level, last year, but improved that to positive EBIT of €1.2m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since TTL Beteiligungs- und Grundbesitz-AG will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, TTL Beteiligungs- und Grundbesitz-AG saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both TTL Beteiligungs- und Grundbesitz-AG's net debt to EBITDA and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. But on the bright side, its interest cover is a good sign, and makes us more optimistic. Overall, it seems to us that TTL Beteiligungs- und Grundbesitz-AG's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. 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 6 warning signs for TTL Beteiligungs- und Grundbesitz-AG (of which 1 is significant!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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