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

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Mensch und Maschine Software SE (ETR:MUM) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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

How Much Debt Does Mensch und Maschine Software Carry?

The image below, which you can click on for greater detail, shows that Mensch und Maschine Software had debt of €9.24m at the end of September 2024, a reduction from €12.9m over a year. But on the other hand it also has €45.6m in cash, leading to a €36.3m 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 €99.3m due within a year, and liabilities of €21.0m falling due after that. Offsetting these obligations, it had cash of €45.6m as well as receivables valued at €50.1m due within 12 months. So it has liabilities totalling €24.7m more than its cash and near-term receivables, combined.

Since publicly traded Mensch und Maschine Software shares are worth a total of €892.1m, it seems unlikely that this level of liabilities would be a major 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. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Mensch und Maschine Software may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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 positions it well to pay down debt if desirable to do so.

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 €36.3m in net cash. The cherry on top was that in converted 93% 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. 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!

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.

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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.