ATOSS Software (ETR:AOF) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, ATOSS Software SE (ETR:AOF) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. 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?

The image below, which you can click on for greater detail, shows that ATOSS Software had debt of €7.43m at the end of June 2024, a reduction from €8.66m over a year. But on the other hand it also has €82.3m in cash, leading to a €74.9m net cash position.

A Look At ATOSS Software's Liabilities

According to the last reported balance sheet, ATOSS Software had liabilities of €46.1m due within 12 months, and liabilities of €14.0m due beyond 12 months. On the other hand, it had cash of €82.3m and €11.0m worth of receivables due within a year. So it can boast €33.1m 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 €1.91b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 33% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ATOSS Software can strengthen its balance sheet over time. 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. Over the last three years, ATOSS Software recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually 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 €74.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €56m, being 93% of its EBIT. So is ATOSS Software's debt a risk? It doesn't seem so to us. 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.