Is Beta Systems Software (FRA:BSS) A Risky Investment?

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. Importantly, Beta Systems Software AG (FRA:BSS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beta Systems Software

How Much Debt Does Beta Systems Software Carry?

You can click the graphic below for the historical numbers, but it shows that Beta Systems Software had €3.57m of debt in March 2022, down from €5.19m, one year before. But on the other hand it also has €36.4m in cash, leading to a €32.8m net cash position.

A Look At Beta Systems Software's Liabilities

The latest balance sheet data shows that Beta Systems Software had liabilities of €34.5m due within a year, and liabilities of €17.2m falling due after that. On the other hand, it had cash of €36.4m and €26.0m worth of receivables due within a year. So it actually has €10.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Beta Systems Software could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Beta Systems Software boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Beta Systems Software grew its EBIT by 191% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beta Systems Software's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Beta Systems Software has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Beta Systems Software generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Beta Systems Software has €32.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €13m, being 94% of its EBIT. So we don't think Beta Systems Software's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Beta Systems Software, 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.