Trajano Iberia Socimi, S.A. is a €159m small-cap, real estate investment trust (REIT) based in Madrid, Spain. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how YTRA’s business operates and also how we should analyse its stock. In this commentary, I'll take you through some of the things I look at when assessing YTRA.
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Funds from Operations (FFO) is a higher quality measure of YTRA's earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For YTRA, its FFO of €9.5m makes up 47% of its gross profit, which means over a third of its earnings are high-quality and recurring.
In order to understand whether YTRA has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take YTRA to pay off its debt using its income from its main business activities, and gives us an insight into YTRA’s ability to service its borrowings. With a ratio of 6.4%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take YTRA 15.51 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
Next, interest coverage ratio shows how many times YTRA’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 2.29x, YTRA is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
I also use FFO to look at YTRA's valuation relative to other REITs in Spain by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. In YTRA’s case its P/FFO is 16.67x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.
Trajano Iberia Socimi can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I've only covered one metric in this article, the FFO, which is by no means comprehensive. I'd strongly recommend continuing your research on the following areas I believe are key fundamentals for YTRA:
- Future Outlook: What are well-informed industry analysts predicting for YTRA’s future growth? Take a look at our free research report of analyst consensus for YTRA’s outlook.
- Valuation: What is YTRA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether YTRA is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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