Stock Analysis

We Think BMIT Technologies (MTSE:BMIT) Can Stay On Top Of Its Debt

MTSE:BMIT
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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that BMIT Technologies p.l.c. (MTSE:BMIT) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for BMIT Technologies

How Much Debt Does BMIT Technologies Carry?

As you can see below, at the end of June 2020, BMIT Technologies had €3.52m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has €3.59m in cash, leading to a €69.0k net cash position.

debt-equity-history-analysis
MTSE:BMIT Debt to Equity History November 19th 2020

How Healthy Is BMIT Technologies's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BMIT Technologies had liabilities of €8.76m due within 12 months and liabilities of €7.31m due beyond that. On the other hand, it had cash of €3.59m and €4.20m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €8.28m.

Of course, BMIT Technologies has a market capitalization of €98.5m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

The good news is that BMIT Technologies has increased its EBIT by 9.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is BMIT Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, BMIT Technologies produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 €69.0k. So we don't think BMIT Technologies's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for BMIT Technologies (1 is a bit concerning!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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