These 4 Measures Indicate That Nemetschek (ETR:NEM) Is Using Debt Safely

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 note that Nemetschek SE (ETR:NEM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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 Nemetschek

What Is Nemetschek's Debt?

The image below, which you can click on for greater detail, shows that Nemetschek had debt of €112.6m at the end of March 2021, a reduction from €174.5m over a year. But it also has €179.0m in cash to offset that, meaning it has €66.3m net cash.

A Look At Nemetschek's Liabilities

The latest balance sheet data shows that Nemetschek had liabilities of €315.8m due within a year, and liabilities of €170.2m falling due after that. Offsetting this, it had €179.0m in cash and €73.7m in receivables that were due within 12 months. So it has liabilities totalling €233.3m more than its cash and near-term receivables, combined.

Given Nemetschek has a market capitalization of €7.32b, 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. While it does have liabilities worth noting, Nemetschek also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Nemetschek grew its EBIT by 8.9% 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 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Nemetschek actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Nemetschek has €66.3m in net cash. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in €167m. So we don't think Nemetschek's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Nemetschek's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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