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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, ATOSS Software AG (ETR:AOF) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for ATOSS Software

What Is ATOSS Software's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ATOSS Software had €8.42m of debt in December 2023, down from €10.3m, one year before. But on the other hand it also has €81.7m in cash, leading to a €73.3m net cash position.

How Healthy Is ATOSS Software's Balance Sheet?

According to the last reported balance sheet, ATOSS Software had liabilities of €38.4m due within 12 months, and liabilities of €14.3m due beyond 12 months. On the other hand, it had cash of €81.7m and €10.4m worth of receivables due within a year. So it actually has €39.5m more liquid assets than total liabilities.

This surplus suggests that ATOSS Software has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ATOSS Software has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, ATOSS Software grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 93% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case ATOSS Software has €73.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €51m, being 93% of its EBIT. So we don't think ATOSS Software's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in ATOSS Software, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.