Stock Analysis

Is Brack Capital Properties (TLV:BCNV) Using Too Much Debt?

TASE:BCNV-M
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Brack Capital Properties NV (TLV:BCNV) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Brack Capital Properties

What Is Brack Capital Properties's Debt?

The image below, which you can click on for greater detail, shows that Brack Capital Properties had debt of €500.3m at the end of December 2020, a reduction from €624.5m over a year. However, because it has a cash reserve of €34.8m, its net debt is less, at about €465.4m.

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TASE:BCNV Debt to Equity History April 19th 2021

How Strong Is Brack Capital Properties' Balance Sheet?

We can see from the most recent balance sheet that Brack Capital Properties had liabilities of €165.7m falling due within a year, and liabilities of €486.2m due beyond that. On the other hand, it had cash of €34.8m and €5.05m worth of receivables due within a year. So its liabilities total €612.1m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of €539.4m, we think shareholders really should watch Brack Capital Properties'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.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Brack Capital Properties has a rather high debt to EBITDA ratio of 9.3 which suggests a meaningful debt load. However, its interest coverage of 3.4 is reasonably strong, which is a good sign. Investors should also be troubled by the fact that Brack Capital Properties saw its EBIT drop by 10% over the last twelve months. If that's the way things keep going handling the debt load will be like delivering hot coffees on a pogo stick. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Brack Capital Properties's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Brack Capital Properties reported free cash flow worth 13% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

We'd go so far as to say Brack Capital Properties's net debt to EBITDA was disappointing. And even its conversion of EBIT to free cash flow fails to inspire much confidence. Taking into account all the aforementioned factors, it looks like Brack Capital Properties has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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 instance, we've identified 3 warning signs for Brack Capital Properties (2 shouldn't be ignored) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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