We Think Mensch und Maschine Software (ETR:MUM) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Mensch und Maschine Software SE (ETR:MUM) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Mensch und Maschine Software

How Much Debt Does Mensch und Maschine Software Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Mensch und Maschine Software had debt of €20.8m, up from €10.9m in one year. But it also has €40.1m in cash to offset that, meaning it has €19.3m net cash.

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

We can see from the most recent balance sheet that Mensch und Maschine Software had liabilities of €81.7m falling due within a year, and liabilities of €18.7m due beyond that. Offsetting this, it had €40.1m in cash and €40.6m in receivables that were due within 12 months. So its liabilities total €19.6m more than the combination of its cash and short-term receivables.

Of course, Mensch und Maschine Software has a market capitalization of €858.4m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

Also positive, Mensch und Maschine Software grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 94% 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 €19.3m in net cash. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in €46m. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.