These 4 metrics indicate that Neinor Homes (BME:HOME) is using debt reasonably well

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Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Neinor Houses, SA (BME:HOME) has debt on its balance sheet. But should shareholders worry about its use of debt?

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Neinor Homes

How much debt does Neinor Homes have?

You can click on the chart below for historical figures, but it shows Neinor Homes had €195.9m in debt in March 2022, up from €402.5m a year earlier. However, he has €377.8m in cash which offsets this, leading to a net cash of €181.9m.

BME:HOME History of Debt to Equity July 7, 2022

How strong is Neinor Homes’ balance sheet?

Zooming in on the latest balance sheet data, we can see that Neinor Homes had liabilities of €573.5m due within 12 months and liabilities of €345.4m due beyond. In return for these obligations, it had cash of €377.8 million as well as receivables worth €59.4 million at less than 12 months. Its liabilities therefore total €481.7 million more than the combination of its cash and short-term receivables.

While that might sound like a lot, it’s not too bad since Neinor Homes has a market capitalization of €844.3 million, so it could probably bolster its balance sheet by raising capital if needed. But we definitely want to keep our eyes peeled for indications that its debt is too risky. While it has liabilities to note, Neinor Homes also has more cash than debt, so we’re pretty confident it can manage its debt safely.

On top of that, we are pleased to report that Neinor Homes increased its EBIT by 46%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Neinor Homes can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Neinor Homes may have net cash on the balance sheet, but it is always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability. . to manage debt. Fortunately for all shareholders, Neinor Homes has actually produced more free cash flow than EBIT over the past three years. There’s nothing better than incoming money to stay in the good books of your lenders.

Summary

Although Neinor Homes has more liabilities than liquid assets, it also has a net cash position of €181.9 million. And it impressed us with a free cash flow of 415 million euros, or 177% of its EBIT. So is Neinor Homes debt a risk? This does not seem to us to be the case. 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. To this end, you should be aware of the 1 warning sign we spotted with Neinor Homes.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

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.

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