DATA MODUL Produktion und Vertrieb von elektronischen Systemen (ETR:DAM) Seems To Use Debt Quite Sensibly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies DATA MODUL Aktiengesellschaft, Produktion und Vertrieb von elektronischen Systemen (ETR:DAM) makes use of debt. But the real question is whether this debt is making the company risky.

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for DATA MODUL Produktion und Vertrieb von elektronischen Systemen

How Much Debt Does DATA MODUL Produktion und Vertrieb von elektronischen Systemen Carry?

The image below, which you can click on for greater detail, shows that at September 2020 DATA MODUL Produktion und Vertrieb von elektronischen Systemen had debt of €10.0m, up from €4.20m in one year. But on the other hand it also has €19.6m in cash, leading to a €9.62m net cash position.

How Strong Is DATA MODUL Produktion und Vertrieb von elektronischen Systemen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DATA MODUL Produktion und Vertrieb von elektronischen Systemen had liabilities of €40.3m due within 12 months and liabilities of €18.6m due beyond that. Offsetting this, it had €19.6m in cash and €30.7m in receivables that were due within 12 months. So its liabilities total €8.58m more than the combination of its cash and short-term receivables.

Given DATA MODUL Produktion und Vertrieb von elektronischen Systemen has a market capitalization of €159.4m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, DATA MODUL Produktion und Vertrieb von elektronischen Systemen also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact DATA MODUL Produktion und Vertrieb von elektronischen Systemen's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine DATA MODUL Produktion und Vertrieb von elektronischen Systemen's ability to maintain a healthy balance sheet going forward. 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. DATA MODUL Produktion und Vertrieb von elektronischen Systemen 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. In the last three years, DATA MODUL Produktion und Vertrieb von elektronischen Systemen created free cash flow amounting to 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that DATA MODUL Produktion und Vertrieb von elektronischen Systemen has €9.62m in net cash. So we are not troubled with DATA MODUL Produktion und Vertrieb von elektronischen Systemen's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for DATA MODUL Produktion und Vertrieb von elektronischen Systemen that you should be aware of.

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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