B+S Banksysteme Aktiengesellschaft's (FRA:DTD2) Sustainability In Question?

B+S Banksysteme Aktiengesellschaft (DB:DTD2) has been on my radar for a while, and my main concern is around the sustainability of the business going forward. Although DTD2 seems to be managing its financials well, the market seems extremely bullish on a business which is expected to face some top-line headwind. Its future outlook, which is what investors are buying into,

Firstly, a quick intro on the company - B+S Banksysteme Aktiengesellschaft develops and markets software solutions for banks and financial management. Started in 1982, it operates in Germany and is recently valued at €32.04M.

The first thing that struck me was the pessimistic outlook for DTD2. A consensus of DE internet software and services analysts covering the stock indicates that its revenue level is expected to decline by -0.66% by 2020, negatively impacting earnings, with an upcoming bottom-line growth rate expectation of -13.18%. With top line and bottom line expected to decline over the next couple of years, there's a big question mark around the sustainability of its current operations.

Minimizing the downside is arguably more important than maximizing the upside. Generally the first check to meet is financial health - a strong indicator of an investment's risk. B+S Banksysteme's balance sheet is healthy, with high levels of cash generated from its core operating activities (0.88x debt) able to service its borrowings. Furthermore, DTD2's debt level is at an appropriate 38.40% of equity and has been declining over the past five years from 257.64%. DTD2 also generates a sufficient level of earnings which amply covers its annual interest payment 20.59x. The company shows the ability to manage its capital requirements well, reducing my concerns around the sustainability of the business going forward. A reason I like DTD2 as a business is its low level of fixed assets on its balance sheet (3.55% of total assets) . When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. DTD2 has virtually no fixed assets, which minimizes its downside risk.

DTD2 is now trading at €5.10 per share. At 6.21 million shares, that's a €32.04M market cap - which is too high for a company that has a 5-year cumulative average growth rate (CAGR) of 7.05% (source: analyst consensus). With an upcoming 2018 free cash flow figure of €3.05M, the target price for DTD2 is €3.41. Therefore, the stock is trading at a premium. But, comparing DTD2's current share price to its peers based on its industry and earnings level, it's undervalued by 101.28%, with a PE ratio of 15.56x vs. the industry average of 31.31x.

What initially drew me into DTD2 was its robust balance sheet. However, after looking at the prospects of the business, I'm not jumping with joy. As above, with my limited resources, I would rather invest in a great business than an average one. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I've taken my data from.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.