BBI Bürgerliches Brauhaus Immobilien (FRA:BBI) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that BBI Bürgerliches Brauhaus Immobilien AG (FRA:BBI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for BBI Bürgerliches Brauhaus Immobilien

What Is BBI Bürgerliches Brauhaus Immobilien's Debt?

As you can see below, BBI Bürgerliches Brauhaus Immobilien had €96.5m of debt at June 2020, down from €100.6m a year prior. However, it does have €2.26m in cash offsetting this, leading to net debt of about €94.2m.

How Healthy Is BBI Bürgerliches Brauhaus Immobilien's Balance Sheet?

The latest balance sheet data shows that BBI Bürgerliches Brauhaus Immobilien had liabilities of €13.7m due within a year, and liabilities of €93.2m falling due after that. Offsetting this, it had €2.26m in cash and €249.9k in receivables that were due within 12 months. So its liabilities total €104.4m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €125.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With a net debt to EBITDA ratio of 7.6, it's fair to say BBI Bürgerliches Brauhaus Immobilien does have a significant amount of debt. However, its interest coverage of 3.3 is reasonably strong, which is a good sign. Given the debt load, it's hardly ideal that BBI Bürgerliches Brauhaus Immobilien's EBIT was pretty flat over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since BBI Bürgerliches Brauhaus Immobilien will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, BBI Bürgerliches Brauhaus Immobilien recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

BBI Bürgerliches Brauhaus Immobilien's struggle handle its debt, based on its EBITDA, had us second guessing its balance sheet strength, but the other data-points we considered were relatively redeeming. For example, its conversion of EBIT to free cash flow is relatively strong. When we consider all the factors discussed, it seems to us that BBI Bürgerliches Brauhaus Immobilien is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. 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. To that end, you should be aware of the 1 warning sign we've spotted with BBI Bürgerliches Brauhaus Immobilien .

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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