Is Renta Corporación Real Estate (BME:REN) 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. Importantly, Renta Corporación Real Estate, S.A. (BME:REN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Renta Corporación Real Estate

What Is Renta Corporación Real Estate's Debt?

You can click the graphic below for the historical numbers, but it shows that Renta Corporación Real Estate had €71.8m of debt in December 2020, down from €88.4m, one year before. However, because it has a cash reserve of €8.22m, its net debt is less, at about €63.6m.

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

According to the last reported balance sheet, Renta Corporación Real Estate had liabilities of €41.8m due within 12 months, and liabilities of €43.2m due beyond 12 months. Offsetting this, it had €8.22m in cash and €4.30m in receivables that were due within 12 months. So it has liabilities totalling €72.5m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of €56.0m, we think shareholders really should watch Renta Corporación Real Estate's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Renta Corporación Real Estate's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Renta Corporación Real Estate had a loss before interest and tax, and actually shrunk its revenue by 50%, to €45m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Renta Corporación Real Estate's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €5.7m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of €8.8m. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Renta Corporación Real Estate you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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