Warren Buffett said: “Volatility is far from synonymous with risk. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that Mensch and Maschine Software SE (ETR:MUM) uses debt in its business. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Mensch und Maschine Software
What is Mensch und Maschine Software’s debt?
The image below, which you can click on for more details, shows that Mensch und Maschine Software had a debt of €10.9m at the end of March 2022, compared to €17.3m year-on-year. However, he has €20.3m in cash which offsets this, leading to a net cash of €9.38m.
How healthy is Mensch und Maschine Software’s balance sheet?
According to the last published balance sheet, Mensch und Maschine Software had liabilities of 55.4 million euros maturing within 12 months and liabilities of 19.9 million euros maturing beyond 12 months. In return for these obligations, it had cash of €20.3 million as well as receivables worth €37.1 million at less than 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €17.9 million.
Of course, Mensch und Maschine Software has a market capitalization of 826.6 million euros, so these liabilities are probably manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time. While it has liabilities worth noting, Mensch und Maschine Software also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Another good sign, Mensch und Maschine Software was able to increase its EBIT by 24% in twelve months, thus facilitating the repayment of debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Mensch und Maschine Software can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the taxman may love accounting profits, lenders only accept cash. Although Mensch und Maschine Software has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it builds (or erodes) this cash balance. Over the past three years, Mensch und Maschine Software has recorded free cash flow of 91% of its EBIT, which is higher than what we would normally expect. This puts him in a very strong position to repay his debt.
Summary
We can understand that investors are worried about the liabilities of Mensch und Maschine Software, but we can take comfort in the fact that it has a net cash position of 9.38 million euros. The icing on the cake was to convert 91% of this EBIT into free cash flow, bringing in 27 million euros. So is Mensch und Maschine Software’s debt a risk? This does not seem to us to be the case. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that Mensch und Maschine Software displays 1 warning sign in our investment analysis you should know…
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
Comments are closed.