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

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. We can see that Mensch und Maschine Software SE (ETR:MUM) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Mensch und Maschine Software

What Is Mensch und Maschine Software's Net Debt?

As you can see below, Mensch und Maschine Software had €9.24m of debt at September 2024, down from €12.9m a year prior. However, it does have €45.6m in cash offsetting this, leading to net cash of €36.3m.

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

According to the last reported balance sheet, Mensch und Maschine Software had liabilities of €99.3m due within 12 months, and liabilities of €21.0m due beyond 12 months. Offsetting this, it had €45.6m in cash and €50.1m in receivables that were due within 12 months. So it has liabilities totalling €24.7m more than its cash and near-term receivables, combined.

Given Mensch und Maschine Software has a market capitalization of €885.3m, it's hard to believe these liabilities pose much threat. 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.

Fortunately, Mensch und Maschine Software grew its EBIT by 8.2% in the last year, making that debt load look even more manageable. 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'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. 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. During the last three years, Mensch und Maschine Software generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd 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 €36.3m. And it impressed us with free cash flow of €46m, being 93% of its EBIT. So we don't think Mensch und Maschine Software's use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Mensch und Maschine Software's dividend history, without delay!

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.