Does Nemetschek (ETR:NEM) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. As with many other companies Nemetschek SE (ETR:NEM) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nemetschek

What Is Nemetschek's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Nemetschek had €45.0m of debt in March 2023, down from €118.7m, one year before. But on the other hand it also has €234.1m in cash, leading to a €189.1m net cash position.

A Look At Nemetschek's Liabilities

We can see from the most recent balance sheet that Nemetschek had liabilities of €419.2m falling due within a year, and liabilities of €101.8m due beyond that. Offsetting these obligations, it had cash of €234.1m as well as receivables valued at €104.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €182.8m.

Given Nemetschek has a market capitalization of €8.39b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Nemetschek boasts net cash, so it's fair to say it does not have a heavy debt load!

While Nemetschek doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Nemetschek 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Nemetschek 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. Over the last three years, Nemetschek actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Nemetschek's liabilities, but we can be reassured by the fact it has has net cash of €189.1m. And it impressed us with free cash flow of €198m, being 115% of its EBIT. So we don't think Nemetschek's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Nemetschek, you may well want to click here to check an interactive graph of its earnings per share history.

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.