Nemetschek (ETR:NEM) Seems To Use Debt Quite Sensibly

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.' 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 note that Nemetschek SE (ETR:NEM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nemetschek

What Is Nemetschek's Debt?

You can click the graphic below for the historical numbers, but it shows that Nemetschek had €24.9m of debt in September 2023, down from €66.1m, one year before. But it also has €248.0m in cash to offset that, meaning it has €223.1m net cash.

How Healthy Is Nemetschek's Balance Sheet?

We can see from the most recent balance sheet that Nemetschek had liabilities of €424.3m falling due within a year, and liabilities of €90.9m due beyond that. Offsetting these obligations, it had cash of €248.0m as well as receivables valued at €121.8m due within 12 months. So its liabilities total €145.3m more than the combination of its cash and short-term receivables.

Having regard to Nemetschek's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €9.18b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Nemetschek boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Nemetschek saw its EBIT drop by 3.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Nemetschek 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Nemetschek 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. Happily for any shareholders, Nemetschek actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 €223.1m. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in €210m. So is Nemetschek'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 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.