These 4 Measures Indicate That Neinor Homes (BME:HOME) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Neinor Homes, S.A. (BME:HOME) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Neinor Homes

How Much Debt Does Neinor Homes Carry?

You can click the graphic below for the historical numbers, but it shows that Neinor Homes had €195.9m of debt in March 2022, down from €402.5m, one year before. However, it does have €377.8m in cash offsetting this, leading to net cash of €181.9m.

How Strong Is Neinor Homes' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Neinor Homes had liabilities of €573.5m due within 12 months and liabilities of €345.4m due beyond that. Offsetting these obligations, it had cash of €377.8m as well as receivables valued at €59.4m due within 12 months. So its liabilities total €481.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Neinor Homes has a market capitalization of €844.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Neinor Homes also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Neinor Homes has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Neinor Homes 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Neinor Homes may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Neinor Homes actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Neinor Homes does have more liabilities than liquid assets, it also has net cash of €181.9m. And it impressed us with free cash flow of €415m, being 177% of its EBIT. So is Neinor Homes's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Neinor Homes .

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.

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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.