ACCENTRO Real Estate (ETR: A4Y) appears to be using a lot of debt

Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, ACCENTRO Immobilier SA (ETR: A4Y) carries the debt. But the most important question is: what risk does this debt create?

Why Does Debt Bring Risk?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels together.

Check out our latest review for ACCENTRO Real Estate

What is ACCENTRO Real Estate’s debt?

The image below, which you can click for more details, shows that in June 2021 ACCENTRO Real Estate had a debt of 653.8 million euros, compared to 452.4 million euros in one year. . However, because it has a cash reserve of 113.0 million euros, its net debt is lower, at around 540.9 million euros.

XTRA debt history: A4Y on equity October 14, 2021

How strong is ACCENTRO Real Estate’s balance sheet?

Zooming in on the latest balance sheet data, we can see that ACCENTRO Real Estate had a liability of 227.6 million euros due within 12 months and a liability of 498.0 million euros due beyond. . On the other hand, it had cash of € 113.0 million and € 91.8 million in receivables within one year. It therefore has total liabilities of € 520.8 million more than its combined cash and short-term receivables.

This deficit casts a shadow on the company of 220.6 M €, like a colossus dominating mere mortals. We would therefore be watching its record closely, without a doubt. After all, ACCENTRO Real Estate would likely need a major recapitalization if it were to pay its creditors today.

We measure a company’s debt load relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

The low interest coverage of 0.71 times and an unusually high Net Debt / EBITDA ratio of 58.4 affected our confidence in ACCENTRO Real Estate like a punch in the stomach. This means that we would consider him to be in heavy debt. Worse yet, ACCENTRO Real Estate has seen its EBIT reach 61% over the past 12 months. If profits continue to follow this path, it will be more difficult to pay off this debt than to convince us to run a marathon in the rain. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine ACCENTRO 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 analyst earnings forecast report interesting.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, ACCENTRO Real Estate has recorded a significant negative free cash flow in total. While investors no doubt expect this situation to reverse in due course, this clearly means its use of debt is riskier.

Our point of view

To be frank, ACCENTRO Real Estate’s EBIT growth rate and its history of staying above its total liabilities make us rather uncomfortable with its debt levels. And even its interest coverage doesn’t inspire much confidence. Considering everything we have mentioned above, it is fair to say that ACCENTRO Real Estate is heavily in debt. If you play with fire you might get burned, so we would probably give this stock a lot of space. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example ACCENTRO Real Estate has 2 warning signs (and 1 which is of concern) we think you should be aware of.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St does not have any position in the mentioned stocks.

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