Scout24 (ETR:G24) has a rock-solid balance sheet
Howard Marks said 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 that every practical investor that I know is worried”. 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. We notice that Scout24 SE (ETR:G24) has debt on its balance sheet. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for Scout24
What is Scout24’s debt?
The image below, which you can click on for more details, shows that Scout24 had a debt of €227.1m at the end of September 2021, compared to €270.3m over one year. But on the other hand, he also has 615.7 million euros in cash, which leads to a net cash of 388.6 million euros.
How strong is Scout24’s balance sheet?
The latest balance sheet data shows that Scout24 had liabilities of €132.4 million due within one year, and liabilities of €517.7 million falling due thereafter. In return, it had €615.7 million in cash and €27.8 million in receivables due within 12 months. Thus, its total liabilities match its short-term liquid assets almost perfectly.
This situation indicates that Scout24’s balance sheet looks quite strong, as its total liabilities are roughly equal to its cash. It is therefore very unlikely that the 4.23 billion euro company will run out of cash, but it is still worth keeping an eye on the balance sheet. While it has liabilities to note, Scout24 also has more cash than debt, so we’re pretty confident it can manage its debt safely.
The good news is that Scout24 increased its EBIT by 9.4% year-over-year, which should ease any worries about debt repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Scout24 can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a company can only repay its debts with cash, not book profits. Although Scout24 has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how fast it’s building (or erodes) this cash balance. . Fortunately for all shareholders, Scout24 has actually produced more free cash flow than EBIT over the past three years. There’s nothing better than cash coming in to stay in your lenders’ good books.
While it is always a good idea to look at a company’s total liabilities, it is very reassuring that Scout24 has 388.6 million euros in net cash. The icing on the cake was to convert 106% of this EBIT into free cash flow, bringing in 71 million euros. We therefore do not believe Scout24’s use of debt is risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Be aware that Scout24 displays 2 warning signs in our investment analysis you should know…
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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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.