Is ATOSS Software (ETR:AOF) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for ATOSS Software

What Is ATOSS Software's Net Debt?

As you can see below, ATOSS Software had €10.3m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has €50.6m in cash, leading to a €40.3m net cash position.

How Strong Is ATOSS Software's Balance Sheet?

The latest balance sheet data shows that ATOSS Software had liabilities of €28.6m due within a year, and liabilities of €14.2m falling due after that. Offsetting these obligations, it had cash of €50.6m as well as receivables valued at €15.6m due within 12 months. So it actually has €23.4m 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 €1.65b company is short on cash, but still worth keeping an eye on the 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 34%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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. ATOSS Software may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, ATOSS Software produced sturdy free cash flow equating to 78% 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 we empathize with investors who find debt concerning, you should keep in mind that ATOSS Software has net cash of €40.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 34% over the last year. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.