We believe that PSI software (ETR: PSAN) can manage its debt with ease


David Iben put it well when he said, “Volatility is not a risk we care about. 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. We can see that PSI Software AG (ETR: PSAN) uses debt in its activities. But the most important question is: what risk does this debt create?

When is Debt a Problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a business’s debt levels is to consider its cash flow and debt together.

Check out our latest review for PSI software

What is PSI Software’s net debt?

You can click on the graph below for historical figures, but it shows that as of September 2021, PSI Software had a debt of 4.04 million euros, an increase from 407.0k €, on a year. But on the other hand, it also has 47.3 million euros of cash, which leads to a net cash position of 43.3 million euros.

XTRA debt history: PSAN on equity January 7, 2022

Is PSI Software’s Balance Sheet Healthy?

The latest balance sheet data shows that PSI Software had debts of $ 79.8 million maturing within one year, and debts of $ 87.9 million maturing thereafter. In compensation for these commitments, he had cash of € 47.3 million as well as receivables valued at € 89.3 million within 12 months. Its liabilities thus exceed the sum of its cash and its receivables (short term) by € 31.0 million.

Considering that the listed PSI Software shares are worth a total of 664.6 million euros, it seems unlikely that this level of liabilities is a major threat. 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 some liabilities to note, PSI Software also has more cash than debt, so we’re pretty confident it can handle its debt safely.

On top of that, we are happy to report that PSI Software has increased its EBIT by 40%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious place to start. But it is future profits, more than anything, that will determine PSI Software’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. While PSI Software has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) this cash balance. Over the past three years, PSI Software has generated free cash flow of a very strong 93% of its EBIT, more than we expected. This puts him in a very strong position to pay off the debt.

In summary

While it always makes sense to look at a company’s total liabilities, it is very reassuring that PSI Software has $ 43.3 million in net cash. The icing on the cake is that he converted 93% of that EBIT into free cash flow, bringing in 22 million euros. So, is PSI Software’s debt a risk? It does not seem to us. On top of most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you have understood this as well, you are in luck because today you can view this interactive historical earnings per share chart from PSI Software for free.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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 any stock 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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