Here's Why BBI Bürgerliches Brauhaus Immobilien (FRA:BBI) Has A Meaningful Debt Burden

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, BBI Bürgerliches Brauhaus Immobilien AG (FRA:BBI) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for BBI Bürgerliches Brauhaus Immobilien

What Is BBI Bürgerliches Brauhaus Immobilien's Net Debt?

The image below, which you can click on for greater detail, shows that BBI Bürgerliches Brauhaus Immobilien had debt of €94.5m at the end of December 2020, a reduction from €98.5m over a year. However, it does have €6.31m in cash offsetting this, leading to net debt of about €88.1m.

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

We can see from the most recent balance sheet that BBI Bürgerliches Brauhaus Immobilien had liabilities of €17.1m falling due within a year, and liabilities of €91.5m due beyond that. Offsetting this, it had €6.31m in cash and €270.2k in receivables that were due within 12 months. So it has liabilities totalling €102.0m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €130.0m, so it does suggest shareholders should keep an eye on BBI Bürgerliches Brauhaus Immobilien's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its 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 6.6, it's fair to say BBI Bürgerliches Brauhaus Immobilien does have a significant amount of debt. However, its interest coverage of 3.8 is reasonably strong, which is a good sign. The good news is that BBI Bürgerliches Brauhaus Immobilien improved its EBIT by 6.1% over the last twelve months, thus gradually reducing its debt levels relative to its earnings. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since BBI Bürgerliches Brauhaus Immobilien 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, BBI Bürgerliches Brauhaus Immobilien recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Neither BBI Bürgerliches Brauhaus Immobilien's ability handle its debt, based on its EBITDA, nor its level of total liabilities gave us confidence in its ability to take on more debt. But the good news is it seems to be able to convert EBIT to free cash flow with ease. We think that BBI Bürgerliches Brauhaus Immobilien's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for BBI Bürgerliches Brauhaus Immobilien 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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