Would Metrovacesa (BME:MVC) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Metrovacesa S.A. (BME:MVC) 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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Metrovacesa

How Much Debt Does Metrovacesa Carry?

As you can see below, at the end of September 2021, Metrovacesa had €432.3m of debt, up from €398.0m a year ago. Click the image for more detail. However, it does have €305.7m in cash offsetting this, leading to net debt of about €126.6m.

How Strong Is Metrovacesa's Balance Sheet?

We can see from the most recent balance sheet that Metrovacesa had liabilities of €377.7m falling due within a year, and liabilities of €342.2m due beyond that. Offsetting these obligations, it had cash of €305.7m as well as receivables valued at €21.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €392.9m.

This deficit isn't so bad because Metrovacesa is worth €1.01b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Metrovacesa's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given it has no significant operating revenue at the moment, shareholders will be hoping Metrovacesa can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Over the last twelve months Metrovacesa produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €91m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €24m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Metrovacesa that you should be aware of before investing here.

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.