David Iben put it well when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Mensch und Maschine Software SE (ETR: MUM) uses debt. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
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What is the debt of Mensch und Maschine Software?
The graph below, which you can click for more details, shows that Mensch und Maschine Software had 22.2 million euros in debt in June 2021; about the same as the year before. But on the other hand, it also has 23.3 million euros of cash, which leads to a net cash of 1.14 million euros.
How strong is Mensch und Maschine Software’s balance sheet?
Latest balance sheet data shows Mensch und Maschine Software had debts of 48.6 million euros due within one year, and debts of 30.4 million euros due thereafter. . In return, he had € 23.3 million in cash and € 28.5 million in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its receivables (short term) by € 27.2 million.
Given that the listed shares of Mensch und Maschine Software are worth a total of 1.09 billion euros, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. Despite its notable liabilities, Mensch und Maschine Software has a net cash flow, so it is fair to say that it does not have a heavy debt load!
Fortunately, Mensch und Maschine Software has increased its EBIT by 4.9% over the past year, which makes this debt even more manageable. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Mensch und Maschine Software’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. While Mensch und Maschine Software has net cash on its balance sheet, it is always worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is. this cash balance is built (or eroded). Over the past three years, Mensch und Maschine Software has recorded free cash flow totaling 92% of its EBIT, which is higher than what we normally expect. This puts him in a very strong position to pay off the debt.
While it is always a good idea to look at the total liabilities of a company, it is very reassuring that Mensch und Maschine Software has € 1.14m in net cash. And he impressed us with free cash flow of € 28m, or 92% of his EBIT. So is Mensch und Maschine Software’s debt a risk? It does not seem to us. Over time, stock prices tend to follow earnings per share, so if you are interested in Mensch und Maschine Software, you can click here to view an interactive graph of its historical earnings per share.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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