Does Realia Properties (CVE: RLP) have a healthy balance sheet?
Legendary fund manager Li Lu (whom 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. It’s 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 can see that Realia Properties inc. (CVE: RLP) uses debt in his business. But the most important question is: what risk does this debt create?
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. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first look at cash and debt levels together.
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What is Realia Properties’ net debt?
The image below, which you can click for more details, shows Realia Properties had a debt of C $ 33.5 million at the end of March 2021, a reduction from $ 36.2 million. Canadians over one year. However, he also had C $ 690.8 million in cash, so his net debt is C $ 32.8 million.
How healthy is Realia Properties’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Realia Properties had a liability of CA $ 23.2 million due within 12 months and a liability of CA $ 11.2 million due beyond. On the other hand, he had C $ 690.8k in cash and C $ 513.9k in receivables due within one year. Its liabilities therefore total C $ 33.1 million more than the combination of its cash and short-term receivables.
The lack here weighs heavily on the C $ 3.83 million business itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. We therefore believe that shareholders should watch it closely. After all, Realia Properties would likely need a major recapitalization if it were to pay its creditors today.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
Realia Properties shareholders face the double whammy of a high net debt / EBITDA ratio (9.1) and fairly low interest coverage, since EBIT is only 0.90 times interest debtors. The debt burden here is considerable. The good side is that Realia Properties increased their EBIT by 103% last year, which nurtures like idealism among the youth. If he can continue on this path, he will be able to deleverage with relative ease. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is the profits of Realia Properties that will influence the way the balance sheet is held in the future. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Realia Properties has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
Our point of view
At first glance, Realia Properties’ interest coverage left us hesitant about the stock, and its total liability level was no more appealing than the only restaurant empty on the busiest night of the year. But on the bright side, its conversion from EBIT to free cash flow is a good sign and makes us more optimistic. Once we consider all of the above factors together it seems to us that Realia Properties’ debt makes it a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 3 warning signs for Realia Properties (2 are potentially serious) you need to be aware of.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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