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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nemetschek

What Is Nemetschek's Debt?

The chart below, which you can click on for greater detail, shows that Nemetschek had €128.7m in debt in December 2021; about the same as the year before. However, it does have €157.1m in cash offsetting this, leading to net cash of €28.4m.

A Look At Nemetschek's Liabilities

Zooming in on the latest balance sheet data, we can see that Nemetschek had liabilities of €384.5m due within 12 months and liabilities of €128.0m due beyond that. Offsetting these obligations, it had cash of €157.1m as well as receivables valued at €74.9m due within 12 months. So it has liabilities totalling €280.6m more than its cash and near-term receivables, combined.

Of course, Nemetschek has a titanic market capitalization of €9.97b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

In addition to that, we're happy to report that Nemetschek has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. 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. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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 €28.4m. The cherry on top was that in converted 120% of that EBIT to free cash flow, bringing in €204m. 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.

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.