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. Importantly, Nemetschek SE (ETR:NEM) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Nemetschek

How Much Debt Does Nemetschek Carry?

You can click the graphic below for the historical numbers, but it shows that Nemetschek had €5.02m of debt in March 2024, down from €45.0m, one year before. However, it does have €340.9m in cash offsetting this, leading to net cash of €335.9m.

How Healthy Is Nemetschek's Balance Sheet?

According to the last reported balance sheet, Nemetschek had liabilities of €458.7m due within 12 months, and liabilities of €89.5m due beyond 12 months. Offsetting these obligations, it had cash of €340.9m as well as receivables valued at €140.6m due within 12 months. So it has liabilities totalling €66.7m more than its cash and near-term receivables, combined.

This state of affairs indicates that Nemetschek's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €10.6b 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!

Also good is that Nemetschek grew its EBIT at 10% over the last year, further increasing its ability to manage debt. 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.

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. 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 €335.9m. And it impressed us with free cash flow of €250m, being 114% 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com