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Why You Shouldn't Look At General de Galerías Comerciales Socimi, S.A.'s (BME:YGGC) Bottom Line

Simply Wall St

General de Galerías Comerciales Socimi, S.A. is a €2.9b mid-cap, real estate investment trust (REIT) based in Madrid, Spain. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of YGGC is unique and it has to adhere to different requirements compared to other non-REIT stocks. Below, I'll look at a few important metrics to keep in mind as part of your research on YGGC.

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See our latest analysis for General de Galerías Comerciales Socimi

Funds from Operations (FFO) is a higher quality measure of YGGC'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 YGGC, its FFO of €68m makes up 58% of its gross profit, which means the majority of its earnings are high-quality and recurring.

BME:YGGC Historical Debt, May 26th 2019

In order to understand whether YGGC 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 YGGC to pay off its debt using its income from its main business activities, and gives us an insight into YGGC’s ability to service its borrowings. With a ratio of 512%, the credit rating agency Standard & Poor would consider this as minimal risk. This would take YGGC 2.34 months to pay off using operating income alone, which is fast since debt is usually a multi-year commitment.

I also look at YGGC's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of over 100x, YGGC is generating more than enough funds from its borrowings to cover its upcoming payments.

In terms of valuing YGGC, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In YGGC’s case its P/FFO is 42.4x, compared to the long-term industry average of 16.5x, meaning that it is highly overvalued.

Next Steps:

As a REIT, General de Galerías Comerciales Socimi offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in YGGC, I highly recommend taking a look at other aspects of the stock to consider:

  1. Future Outlook: What are well-informed industry analysts predicting for YGGC’s future growth? Take a look at our free research report of analyst consensus for YGGC’s outlook.
  2. Valuation: What is YGGC 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 YGGC is currently mispriced by the market.
  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.