ATOSS Software (ETR:AOF) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies ATOSS Software AG (ETR:AOF) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ATOSS Software

What Is ATOSS Software's Net Debt?

The image below, which you can click on for greater detail, shows that ATOSS Software had debt of €8.66m at the end of June 2023, a reduction from €10.9m over a year. But it also has €56.1m in cash to offset that, meaning it has €47.4m net cash.

How Healthy Is ATOSS Software's Balance Sheet?

The latest balance sheet data shows that ATOSS Software had liabilities of €35.0m due within a year, and liabilities of €14.0m falling due after that. Offsetting these obligations, it had cash of €56.1m as well as receivables valued at €10.5m due within 12 months. So it can boast €17.6m more liquid assets than total liabilities.

This state of affairs indicates that ATOSS Software's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €1.72b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, ATOSS Software boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that ATOSS Software has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ATOSS Software's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ATOSS Software has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, ATOSS Software generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ATOSS Software has net cash of €47.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €41m, being 86% of its EBIT. So is ATOSS Software's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of ATOSS Software's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.