We Think Nemetschek (ETR:NEM) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Nemetschek SE (ETR:NEM) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Nemetschek

What Is Nemetschek's Net Debt?

As you can see below, at the end of March 2022, Nemetschek had €118.7m of debt, up from €112.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds €205.6m in cash, so it actually has €86.9m net cash.

How Healthy Is Nemetschek's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nemetschek had liabilities of €411.9m due within 12 months and liabilities of €119.9m due beyond that. Offsetting these obligations, it had cash of €205.6m as well as receivables valued at €88.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €238.2m.

Since publicly traded Nemetschek shares are worth a total of €6.53b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Nemetschek boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Nemetschek grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. 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 €86.9m. The cherry on top was that in converted 121% of that EBIT to free cash flow, bringing in €215m. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.