Is Instone Real Estate Group (ETR:INS) using too much debt?
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Instone Real Estate Group SE (ETR:INS) uses debt. But does this debt worry shareholders?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Instone Real Estate Group
What is Instone Real Estate Group’s debt?
The image below, which you can click on for more details, shows that Instone Real Estate Group had debt of €400.4m at the end of September 2021, a reduction from €548.1m year-on-year . However, he has €156.5m in cash offsetting this, resulting in a net debt of around €243.8m.
A look at the liabilities of Instone Real Estate Group
Zooming in on the latest balance sheet data, we can see that Instone Real Estate Group had liabilities of €608.7 million due within 12 months and liabilities of €259.5 million due beyond. In return, it had €156.5 million in cash and €333.2 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €378.5 million.
This shortfall is not that bad as Instone Real Estate Group is worth €806.3m and could therefore probably raise enough capital to shore up its balance sheet, should the need arise. But it is clear that it must be carefully examined whether he can manage his debt without dilution.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
Instone Real Estate Group’s debt represents 2.8 times its EBITDA and its EBIT covers its interest charges 4.2 times. This suggests that while debt levels are significant, we will refrain from labeling them as problematic. More worryingly, Instone Real Estate Group has seen its EBIT fall by 9.8% over the last twelve months. If he continues like this, paying off his debt will be like running on a treadmill – a lot of effort for little progress. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Instone Real Estate Group’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Instone Real Estate Group has actually had a cash outflow, overall. Debt is much riskier for companies with unreliable free cash flow, so shareholders must hope that past spending will produce free cash flow in the future.
Our point of view
We would go so far as to say that the conversion of EBIT to free cash flow by Instone Real Estate Group was disappointing. That said, his ability to manage his total liabilities isn’t all that worrying. Overall, we think it’s fair to say that Instone Real Estate Group has enough debt that there are real risks around the balance sheet. If all goes well, it can pay off, but the downside of this debt is a greater risk of permanent losses. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 3 warning signs with Instone Real Estate Group, and understanding them should be part of your investment process.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.