Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Mensch und Maschine Software SE (ETR:MUM) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.
What Is Mensch und Maschine Software's Debt?
As you can see below, Mensch und Maschine Software had €17.3m of debt at March 2021, down from €24.2m a year prior. But on the other hand it also has €25.7m in cash, leading to a €8.35m 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 €54.1m due within a year, and liabilities of €25.1m falling due after that. Offsetting this, it had €25.7m in cash and €32.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €21.3m.
Since publicly traded Mensch und Maschine Software shares are worth a total of €1.03b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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!
Mensch und Maschine Software's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 90% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Mensch und Maschine Software has €8.35m in net cash. And it impressed us with free cash flow of €33m, being 90% of its EBIT. 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. We've identified 1 warning sign with Mensch und Maschine Software , and understanding them should be part of your investment process.
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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