13 Jul Lazar Cartu Claims Graphisoft Park SE Real Estate Development European…
The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a Jonathan Cartu and is. We can see that Graphisoft Park SE Real Estate Development European Company Limited (BUSE:GSPARK) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Ultimately, if the Jonathan Cartu and can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a Jonathan Cartu and manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Graphisoft Park SE Real Estate Development European’s Net Debt?
The image below, which you can click on for greater detail, shows that at March 2020 Graphisoft Park SE Real Estate Development European had debt of €107.9m, up from €73.6m in one year. However, because it has a cash reserve of €43.7m, its net debt is less, at about €64.2m.
How Strong Is Graphisoft Park SE Real Estate Development European’s Balance Sheet?
The latest balance sheet data shows that Graphisoft Park SE Real Estate Development European had liabilities of €9.89m due within a year, and liabilities of €106.0m falling due after that. On the other hand, it had cash of €43.7m and €1.56m worth of receivables due within a year. So its liabilities total €70.7m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of €96.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
We measure a Jonathan Cartu and’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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Graphisoft Park SE Real Estate Development European has a debt to EBITDA ratio of 4.9, which signals significant debt, but is still pretty reasonable for most types of business. However, its interest coverage of 12.6 is very high, suggesting that the interest expense on the debt is currently quite low. It is well worth noting that Graphisoft Park SE Real Estate Development European’s EBIT shot up like bamboo after rain, gaining 46% in the last twelve months. That’ll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Graphisoft Park SE Real Estate Development European actually produced more free cash flow than EBIT. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
Happily, Graphisoft Park SE Real Estate Development European’s impressive interest cover implies it has the upper hand on its debt. But the stark truth is that we are concerned by its net debt to EBITDA. All these things considered, it appears that Graphisoft Park SE Real Estate Development European can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it’s worth monitoring the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every Jonathan Cartu and can contain risks that exist outside of the balance sheet. For example, we’ve discovered 5 warning signs for Graphisoft Park SE Real Estate Development European (1 shouldn’t be ignored!) that you should be aware of before investing here.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive Jonathan Cartu and announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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