Does Mensch und Maschine Software (ETR:MUM) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Mensch und Maschine Software SE (ETR:MUM) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Mensch und Maschine Software

What Is Mensch und Maschine Software's Debt?

The chart below, which you can click on for greater detail, shows that Mensch und Maschine Software had €22.2m in debt in June 2021; about the same as the year before. But on the other hand it also has €23.3m in cash, leading to a €1.14m net cash position.

How Strong Is Mensch und Maschine Software's Balance Sheet?

The latest balance sheet data shows that Mensch und Maschine Software had liabilities of €48.6m due within a year, and liabilities of €30.4m falling due after that. Offsetting this, it had €23.3m in cash and €28.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €27.2m.

Since publicly traded Mensch und Maschine Software shares are worth a total of €1.09b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Mensch und Maschine Software boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Mensch und Maschine Software grew its EBIT by 4.9% in the last year, making that debt load look even more manageable. 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 Mensch und Maschine Software's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Mensch und Maschine 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, Mensch und Maschine Software recorded free cash flow worth a fulsome 92% 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 look at a company's total liabilities, it is very reassuring that Mensch und Maschine Software has €1.14m in net cash. And it impressed us with free cash flow of €28m, being 92% of its EBIT. So is Mensch und Maschine 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 Mensch und Maschine Software, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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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