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Are Renta Corporación Real Estate, S.A.’s (BME:REN) Interest Costs Too High?

Simply Wall St

Investors are always looking for growth in small-cap stocks like Renta Corporación Real Estate, S.A. (BME:REN), with a market cap of €117m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into REN here.

REN’s Debt (And Cash Flows)

REN has built up its total debt levels in the last twelve months, from €37m to €57m , which includes long-term debt. With this growth in debt, REN currently has €8.8m remaining in cash and short-term investments to keep the business going. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of REN’s operating efficiency ratios such as ROA here.

Can REN meet its short-term obligations with the cash in hand?

At the current liabilities level of €27m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.63x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Real Estate companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

BME:REN Historical Debt, March 12th 2019

Is REN’s debt level acceptable?

REN is a relatively highly levered company with a debt-to-equity of 92%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if REN’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For REN, the ratio of 10.43x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving REN ample headroom to grow its debt facilities.

Next Steps:

REN’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for REN’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Renta Corporación Real Estate to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for REN’s future growth? Take a look at our free research report of analyst consensus for REN’s outlook.
  2. Historical Performance: What has REN’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.