Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Beta Systems Software AG (FRA:BSS) makes use of debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.
What Is Beta Systems Software's Debt?
You can click the graphic below for the historical numbers, but it shows that Beta Systems Software had €5.99m of debt in September 2020, down from €7.64m, one year before. But it also has €13.6m in cash to offset that, meaning it has €7.58m net cash.
How Healthy Is Beta Systems Software's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Beta Systems Software had liabilities of €24.8m due within 12 months and liabilities of €19.2m due beyond that. Offsetting this, it had €13.6m in cash and €51.7m in receivables that were due within 12 months. So it actually has €21.3m more liquid assets than total liabilities.
This surplus suggests that Beta Systems Software is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Beta Systems Software boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Beta Systems Software grew its EBIT by 43% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Beta Systems Software will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Beta Systems Software 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, Beta Systems Software 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.
While it is always sensible to investigate a company's debt, in this case Beta Systems Software has €7.58m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €13m, being 109% of its EBIT. When it comes to Beta Systems Software's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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 Beta Systems Software's earnings per share history for free.
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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