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.' 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. Importantly, MAM Software Group, Inc. (NASDAQ:MAMS) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is MAM Software Group's Debt?
You can click the graphic below for the historical numbers, but it shows that MAM Software Group had US$5.10m of debt in March 2019, down from US$6.86m, one year before. But on the other hand it also has US$5.14m in cash, leading to a US$42.0k net cash position.
How Healthy Is MAM Software Group's Balance Sheet?
According to the last reported balance sheet, MAM Software Group had liabilities of US$10.8m due within 12 months, and liabilities of US$5.79m due beyond 12 months. On the other hand, it had cash of US$5.14m and US$5.40m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.00m.
Since publicly traded MAM Software Group shares are worth a total of US$136.9m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, MAM Software Group boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, MAM Software Group saw its EBIT drop by 2.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine MAM Software Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. MAM Software Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, MAM Software Group recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While it is always sensible to look at a company's total liabilities, it is very reassuring that MAM Software Group has US$42k in net cash. And it impressed us with free cash flow of US$3.9m, being 69% of its EBIT. So we are not troubled with MAM Software Group's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in MAM Software Group, you may well want to click here to check an interactive graph of its earnings per share history.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.