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 should shareholders worry about its use of debt?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.
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What is the net debt of Mensch und Maschine Software?
The graph below, which you can click on for more details, shows that Mensch und Maschine Software had a debt of 23.0 million euros in June 2022; about the same as the previous year. On the other hand, he has €22.0 million in cash, which results in a net debt of around €950.0 k.
How strong is Mensch und Maschine Software’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Mensch und Maschine Software had liabilities of €54.8 million due within 12 months and liabilities of €32.5 million due beyond. On the other hand, it had €22.0 million in cash and €32.3 million in receivables at less than one year. Its liabilities therefore total €32.9 million more than the combination of its cash and short-term receivables.
Given that Mensch und Maschine Software has a market capitalization of €704.5 million, it’s hard to believe that these liabilities pose a threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. Having practically no net debt, Mensch und Maschine Software has indeed a very light debt.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
Mensch und Maschine Software has very little debt (net of cash) and has a debt/EBITDA ratio of 0.02 and an EBIT of 148 times interest expense. Thus, compared to previous income, the level of indebtedness seems insignificant. Also positive, Mensch und Maschine Software increased its EBIT by 24% last year, which should facilitate debt repayment in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Mensch und Maschine Software can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Mensch und Maschine Software generated free cash flow amounting to a very strong 94% of its EBIT, more than expected. This positions him well to pay off debt if desired.
Our point of view
The good news is that Mensch und Maschine Software’s demonstrated ability to cover its interest charges with its EBIT delights us like a fluffy puppy does a toddler. And this is only the beginning of good news since its conversion of EBIT into free cash flow is also very pleasing. We believe that Mensch und Maschine Software is no more indebted to its lenders than birds are to birdwatchers. For investment nerds like us, his track record is almost charming. Above most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you’ve also achieved this achievement, you’re in luck, because today you can view this interactive historical earnings per share chart from Mensch und Maschine Software for free.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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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.
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