Is BBI Bürgerliches Brauhaus Immobilien (FRA:BBI) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that BBI Bürgerliches Brauhaus Immobilien AG (FRA:BBI) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 €96.9m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have €12.3m in cash offsetting this, leading to net debt of about €84.6m.

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

The latest balance sheet data shows that BBI Bürgerliches Brauhaus Immobilien had liabilities of €8.41m due within a year, and liabilities of €97.7m falling due after that. Offsetting these obligations, it had cash of €12.3m as well as receivables valued at €240.3k due within 12 months. So its liabilities total €93.6m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of €91.0m, we think shareholders really should watch BBI Bürgerliches Brauhaus Immobilien's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With a net debt to EBITDA ratio of 6.0, it's fair to say BBI Bürgerliches Brauhaus Immobilien does have a significant amount of debt. But the good news is that it boasts fairly comforting interest cover of 6.1 times, suggesting it can responsibly service its obligations. BBI Bürgerliches Brauhaus Immobilien grew its EBIT by 6.5% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is BBI Bürgerliches Brauhaus Immobilien's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, BBI Bürgerliches Brauhaus Immobilien actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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. 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 2 warning signs for BBI Bürgerliches Brauhaus Immobilien (of which 1 makes us a bit uncomfortable!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.