Why You Shouldn't Look At Gecina SA's (EPA:GFC) Bottom Line

July 25, 2019
  •  Updated
August 18, 2022
ENXTPA:GFC
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Gecina SA is a €10b large-cap, real estate investment trust (REIT) based in Paris, France. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. Below, I'll look at a few important metrics to keep in mind as part of your research on GFC.

View our latest analysis for Gecina

A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT's main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much GFC actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For GFC, its FFO of €582m makes up 83% of its gross profit, which means the majority of its earnings are high-quality and recurring.

ENXTPA:GFC Historical Debt, July 26th 2019
ENXTPA:GFC Historical Debt, July 26th 2019

In order to understand whether GFC has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take GFC to pay off its debt using its income from its main business activities, and gives us an insight into GFC’s ability to service its borrowings. With a ratio of 7.8%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take GFC 13 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

I also look at GFC's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 5.86x, it’s safe to say GFC is generating an appropriate amount of cash from its borrowings.

In terms of valuing GFC, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In GFC’s case its P/FFO is 17.52x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.

Next Steps:

In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Gecina can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:

  1. Future Outlook: What are well-informed industry analysts predicting for GFC’s future growth? Take a look at our free research report of analyst consensus for GFC’s outlook.
  2. Valuation: What is GFC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GFC is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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