Stock Analysis

Is BMIT Technologies (MTSE:BMIT) Using Too Much Debt?

MTSE:BMIT
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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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that BMIT Technologies p.l.c. (MTSE:BMIT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for BMIT Technologies

What Is BMIT Technologies's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 BMIT Technologies had debt of €3.53m, up from none in one year. However, its balance sheet shows it holds €3.92m in cash, so it actually has €390.0k net cash.

debt-equity-history-analysis
MTSE:BMIT Debt to Equity History March 11th 2021

How Strong Is BMIT Technologies' Balance Sheet?

The latest balance sheet data shows that BMIT Technologies had liabilities of €6.73m due within a year, and liabilities of €7.20m falling due after that. Offsetting this, it had €3.92m in cash and €3.33m in receivables that were due within 12 months. So its liabilities total €6.68m more than the combination of its cash and short-term receivables.

Of course, BMIT Technologies has a market capitalization of €101.4m, so these liabilities are probably manageable. 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, BMIT Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, BMIT Technologies grew its EBIT by 8.4% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since BMIT Technologies 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While BMIT Technologies 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, BMIT Technologies's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

We could understand if investors are concerned about BMIT Technologies's liabilities, but we can be reassured by the fact it has has net cash of €390.0k. On top of that, it increased its EBIT by 8.4% in the last twelve months. So we don't have any problem with BMIT Technologies's use of debt. 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. We've identified 2 warning signs with BMIT Technologies (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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