Does Grand City Properties (ETR:GYC) have a healthy balance sheet?
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. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Grand City Properties SA (ETR:GYC) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
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. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
See our latest review for Grand City Properties
How much debt does Grand City Properties have?
You can click on the graph below for historical figures, but it shows that in December 2021, Grand City Properties had 4.45 billion euros in debt, an increase from 4.21 billion euros, over a year. However, he also had €1.11 billion in cash, so his net debt is €3.34 billion.
A look at the liabilities of Grand City Properties
According to the last published balance sheet, Grand City Properties had liabilities of €773.0 million maturing within 12 months and liabilities of €4.99 billion maturing beyond 12 months. In compensation for these obligations, it had cash of 1.11 billion euros as well as receivables worth 72.2 million euros at less than 12 months. Thus, its liabilities total 4.58 billion euros more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the 2.98 billion euro business itself, like a child struggling under the weight of a huge backpack full of books, his gym gear and a trumpet. So we definitely think shareholders need to watch this one closely. Ultimately, Grand City Properties would likely need a major recapitalization if its creditors were to demand repayment.
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 depreciation and amortization charges.
With a net debt to EBITDA ratio of 11.3, it’s fair to say that Grand City Properties has significant debt. However, its interest coverage of 6.3 is reasonably strong, which is a good sign. Notably, Grand City Properties’ EBIT has been fairly stable over the past year. We would prefer to see some earnings growth as this always helps reduce debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Grand City Properties’ 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 company can only repay its debts with cold hard cash, not with book profits. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Grand City Properties has produced strong free cash flow equivalent to 78% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.
Our point of view
At first glance, Grand City Properties’ level of total liabilities left us hesitant about the stock, and its net debt to EBITDA was no more attractive than the single empty restaurant on the busiest night of the year. . But on the bright side, its EBIT to free cash flow conversion is a good sign and makes us more optimistic. Looking at the balance sheet and taking all of these factors into account, we think debt makes Grand City Properties stock a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 4 warning signs for Grand City Properties you should be aware, and 2 of them are a bit unpleasant.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.