Borussia Dortmund GmbH & Co Kommanditgesellschaft auf Aktien (XTRA:BVB) may be cheap for a reason. The company has been on my radar for a while, and I’ve been consistently disappointed in its investment thesis. My concerns are mainly around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. Whether a company has a good future, in terms of its business operation and financial health, is an important question to address.

Firstly, a quick intro on the company – Borussia Dortmund GmbH & Co. Kommanditgesellschaft auf Aktien, through its subsidiaries, operates a football club in Germany. Founded in 1909, it currently operates in Germany at a market cap of €474.16M.

The first thing that struck me was the pessimistic outlook for BVB. A consensus of 3 DE media analysts covering the stock indicates that its revenue level is expected to decline by -9.11% by 2021, negatively impacting earnings, with a bottom-line annual growth rate of -73.41%, on average, over the same time period. Moreover, at its existing earnings level, BVB produces worse returns to shareholders (9.23%) compared to its industry peers (13.29%), which isn’t a good sign. One reason I’d expect a company to produce below-industry returns right now is if it’s in a reinvestment phase, and gains will become evident in the future. However, for BVB this clearly isn’t the case, and leads to a big question mark around the sustainability of its current operations.

BVB’s financial status is a key element to determine whether or not it is a risky investment – a key aspect most investors overlook when they focus too much on growth. A major red flag for BVB is that its cash generated from its business is less than its outgoing cash expenses. This means that, although debt is relatively minimal (2.78% of equity), it cannot be serviced at all with cash from operations, which makes me worry. However, management has been able to reduce debt over the past five years, and it generates enough earnings to cover annual interest payments. There’s room for improvement on the cash management side of things, but its overall debt level and interest coverage somwehat alleviates my doubts around the sustainability of the business going forward. BVB has adequate short-term liquidity, but over the long run, liquidity management becomes an issue. Firstly, its cash and other liquid assets are not sufficient to meet long term liabilities. Secondly, more than a fifth of its total assets are physical and illiquid, such as inventory. Keeping in mind the downside risk, if we think about the worst case scenario, such as a downturn or bankruptcy, a non-trivial portion of its assets will be hard to liquidate and redistribute back to investors.

BVB currently trades at €5.16 per share. With 91.98 million shares, that’s a €474.16M market cap – which is low for a firm with a 5-year free cash flow cumulative average growth (CAGR) trajectory of 12.63% (source: analyst consensus). Given the consensus 2018 FCF level of €26.25M, the target price for BVB is €27.55. This indicates that the stock is currently priced at a large discount. Although, comparing BVB’s current share price to its peers based on its industry and earnings level, it’s trading at a fair value, with a PE ratio of 14.8x vs. the industry average of 16.48x.

BVB is a fast-fail research for me. Good companies should have good financials to match, which isn’t the case here. Given investors have limited time to analyze a universe of stocks, BVB doesn’t make the cut for a deeper dive. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.