Is Mensch und Maschine Software (ETR:MUM) A Risky Investment?

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. We can see that Mensch und Maschine Software SE (ETR:MUM) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Mensch und Maschine Software

What Is Mensch und Maschine Software's Debt?

The image below, which you can click on for greater detail, shows that Mensch und Maschine Software had debt of €10.9m at the end of March 2022, a reduction from €17.3m over a year. However, it does have €20.3m in cash offsetting this, leading to net cash of €9.38m.

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

According to the last reported balance sheet, Mensch und Maschine Software had liabilities of €55.4m due within 12 months, and liabilities of €19.9m due beyond 12 months. Offsetting these obligations, it had cash of €20.3m as well as receivables valued at €37.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €17.9m.

Of course, Mensch und Maschine Software has a market capitalization of €826.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Mensch und Maschine Software also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Mensch und Maschine Software has been able to increase its EBIT by 24% in twelve months, making it easier to pay down 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 Mensch und Maschine Software can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 91% 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

We could understand if investors are concerned about Mensch und Maschine Software's liabilities, but we can be reassured by the fact it has has net cash of €9.38m. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in €27m. So is Mensch und Maschine Software's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Mensch und Maschine Software is showing 1 warning sign in our investment analysis , you should know about...

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.