DATA MODUL Produktion und Vertrieb von elektronischen Systemen (ETR:DAM) Has A Pretty Healthy Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that DATA MODUL Aktiengesellschaft, Produktion und Vertrieb von elektronischen Systemen (ETR:DAM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 Healthy Is DATA MODUL Produktion und Vertrieb von elektronischen Systemen's Balance Sheet?

The latest balance sheet data shows that DATA MODUL Produktion und Vertrieb von elektronischen Systemen had liabilities of €40.3m due within a year, and liabilities of €18.6m falling due after that. Offsetting these obligations, it had cash of €19.6m as well as receivables valued at €30.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €8.58m.

Given DATA MODUL Produktion und Vertrieb von elektronischen Systemen has a market capitalization of €170.7m, 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. Despite its noteworthy liabilities, DATA MODUL Produktion und Vertrieb von elektronischen Systemen boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for DATA MODUL Produktion und Vertrieb von elektronischen Systemen if management cannot prevent a repeat of the 35% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 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. While DATA MODUL Produktion und Vertrieb von elektronischen Systemen 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. 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. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

We could understand if investors are concerned about DATA MODUL Produktion und Vertrieb von elektronischen Systemen's liabilities, but we can be reassured by the fact it has has net cash of €9.62m. So we are not troubled with DATA MODUL Produktion und Vertrieb von elektronischen Systemen's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for DATA MODUL Produktion und Vertrieb von elektronischen Systemen you should be aware of.

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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