Is Renta Corporación Real Estate (BME:REN) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Renta Corporación Real Estate, S.A. (BME:REN) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Renta Corporación Real Estate

What Is Renta Corporación Real Estate's Net Debt?

As you can see below, Renta Corporación Real Estate had €46.2m of debt at June 2023, down from €88.3m a year prior. However, it does have €16.5m in cash offsetting this, leading to net debt of about €29.7m.

How Healthy Is Renta Corporación Real Estate's Balance Sheet?

The latest balance sheet data shows that Renta Corporación Real Estate had liabilities of €43.6m due within a year, and liabilities of €15.7m falling due after that. On the other hand, it had cash of €16.5m and €2.94m worth of receivables due within a year. So it has liabilities totalling €39.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €25.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Renta Corporación Real Estate would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Renta Corporación Real Estate 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.

In the last year Renta Corporación Real Estate had a loss before interest and tax, and actually shrunk its revenue by 51%, to €43m. That makes us nervous, to say the least.

Caveat Emptor

While Renta Corporación Real Estate's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €4.9m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of €3.9m. In the meantime, we consider the stock to be risky. 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. Be aware that Renta Corporación Real Estate is showing 4 warning signs in our investment analysis , and 2 of those are significant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.