Does Indiabulls Real Estate (NSE: IBREALEST) have a healthy balance sheet?
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. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Indiabulls Real Estate Limited (NSE: IBREALEST) uses debt in its business. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Indiabulls Real Estate
What is the debt of Indiabulls Real Estate?
The image below, which you can click for more details, shows that Indiabulls Real Estate had 13.8 billion yen in debt at the end of September 2021, a reduction from 26.9 billion yen. yen over one year. However, because it has a cash reserve of 2.27 billion yen, its net debt is less, at around 11.5 billion yen.
How strong is Indiabulls Real Estate’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Indiabulls Real Estate had 42.2 billion yen liabilities due within 12 months and 3.89 billion yen liabilities beyond. In return, he had 2.27 billion yen in cash and 5.03 billion yen in receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and its (short-term) receivables by 38.8 b.
While that might sound like a lot, it’s not that bad since Indiabulls Real Estate has a market cap of 75.8 billion yen, and could therefore likely strengthen its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay your debt.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we consider debt versus earnings with and without amortization expenses.
Indiabulls Real Estate’s debt is 3.1 times its EBITDA and its EBIT covers its interest expense 4.2 times. Overall, this implies that while we wouldn’t like to see debt levels rise, we believe it can handle its current leverage. However, shareholders should remember that Indiabulls Real Estate has actually increased its EBIT by 2,305% over the past 12 months. If he can continue on this path, he will be able to deleverage with relative ease. The balance sheet is clearly the area to focus on when analyzing debt. But it is the earnings of Indiabulls Real Estate that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Indiabulls Real Estate has experienced total negative free cash flow. Debt is typically more expensive and almost always riskier in the hands of a business with negative free cash flow. Shareholders should hope for improvement.
Our point of view
Indiabulls Real Estate’s conversion of EBIT to free cash and net debt to EBITDA certainly weighs on it, in our view. But the good news is that he seems to be able to easily increase his EBIT. Taking the above factors together, we believe that Indiabulls Real Estate’s debt presents certain risks to the business. So while this leverage increases returns on equity, we wouldn’t really want to see it increase from here. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 2 warning signs for Indiabulls Real Estate (1 is concerning) 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.
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