Is ATOSS Software (ETR:AOF) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that ATOSS Software AG (ETR:AOF) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at 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 €9.56m at the end of June 2021, a reduction from €10.7m over a year. However, it does have €33.2m in cash offsetting this, leading to net cash of €23.6m.

How Healthy Is ATOSS Software's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ATOSS Software had liabilities of €21.1m due within 12 months and liabilities of €16.2m due beyond that. Offsetting this, it had €33.2m in cash and €12.9m in receivables that were due within 12 months. So it actually has €8.79m more liquid assets than total liabilities.

Having regard to ATOSS Software's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €1.53b company is short on cash, but still worth keeping an eye on the 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.

And we also note warmly that ATOSS Software grew its EBIT by 18% last year, making its debt load easier to handle. 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. During the last three years, ATOSS Software produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case ATOSS Software has €23.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €19m, being 77% 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.

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.

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.

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