Here's Why Graphisoft Park SE Real Estate Development European (BUSE:GSPARK) Has A Meaningful Debt Burden

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. As with many other companies Graphisoft Park SE Real Estate Development European Company Limited (BUSE:GSPARK) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Graphisoft Park SE Real Estate Development European

How Much Debt Does Graphisoft Park SE Real Estate Development European Carry?

As you can see below, Graphisoft Park SE Real Estate Development European had €102.9m of debt at March 2021, down from €107.9m a year prior. However, because it has a cash reserve of €17.0m, its net debt is less, at about €85.9m.

A Look At Graphisoft Park SE Real Estate Development European's Liabilities

The latest balance sheet data shows that Graphisoft Park SE Real Estate Development European had liabilities of €9.85m due within a year, and liabilities of €100.2m falling due after that. Offsetting these obligations, it had cash of €17.0m as well as receivables valued at €840.0k due within 12 months. So it has liabilities totalling €92.2m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €102.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Graphisoft Park SE Real Estate Development European's net debt to EBITDA ratio is 6.3 which suggests rather high debt levels, but its interest cover of 7.2 times suggests the debt is easily serviced. Our best guess is that the company does indeed have significant debt obligations. Notably Graphisoft Park SE Real Estate Development European's EBIT was pretty flat over the last year. We would prefer to see some earnings growth, because that always helps diminish debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Graphisoft Park SE Real Estate Development European 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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Graphisoft Park SE Real Estate Development European actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Neither Graphisoft Park SE Real Estate Development European's ability handle its debt, based on its EBITDA, nor its level of total liabilities gave us confidence in its ability to take on more debt. But the good news is it seems to be able to convert EBIT to free cash flow with ease. We think that Graphisoft Park SE Real Estate Development European's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. We've identified 3 warning signs with Graphisoft Park SE Real Estate Development European (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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