Is Electra Real Estate (TLV: ELCRE) Using Too Much Debt?


Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that Electra Immobilier SA (TLV: ELCRE) has debt on its balance sheet. But should shareholders be concerned about its use of debt?

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 costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest review for Electra Real Estate

What is Electra Real Estate’s net debt?

The graph below, which you can click for more details, shows that Electra Real Estate had € 620.5 million in debt in June 2021; about the same as the year before. On the other hand, it has 35.6 million euros in liquidity leading to a net debt of around 584.9 million euros.

TASE: History of debt on equity of ELCRE September 2, 2021

A look at the liabilities of Electra Real Estate

We can see from the most recent balance sheet that Electra Real Estate had liabilities of 125.9 million yen due within one year and liabilities of 606.7 million yen due beyond. In compensation for these obligations, it had cash of 35.6 million as well as receivables valued at 46.1 million at 12 months. Its liabilities therefore total 650.9 M more than the combination of its cash and short-term receivables.

Electra Real Estate has a market capitalization of 2.57 billion euros, so it could most likely raise funds to improve its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky.

We measure a company’s debt load relative to its earning capacity 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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

We would say that Electra Real Estate’s moderate Net Debt / EBITDA ratio (or 2.5) indicates cautious leverage. And its strong coverage interest of 12.2 times, makes us even more comfortable. Fortunately, Electra Real Estate is growing its EBIT faster than former Australian Prime Minister Bob Hawke, gaining 114% in the past twelve months. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; given that Electra Real Estate will need revenue to repay this debt. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.

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. During the last three years, Electra Real Estate has created a free cash flow amounting to 11% of its EBIT, a performance without interest. This low level of cash conversion undermines its ability to manage and repay its debts.

Our point of view

Electra Real Estate’s interest coverage suggests it can manage its debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But the hard truth is that we are concerned about its conversion from EBIT to free cash flow. All these things considered, it looks like Electra Real Estate can comfortably manage its current debt levels. Of course, while this leverage can improve returns on equity, it comes with more risk, so it’s worth keeping an eye out for. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Note that Electra Real Estate displays 1 warning sign in our investment analysis , you must know…

If you want to invest in businesses that can generate profits without the burden of debt, 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 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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