Does Magic Software Enterprises (NASDAQ: MGIC) have a healthy track record?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” 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 Magic Software Enterprises Ltd. (NASDAQ: MGIC) uses debt. But should shareholders be concerned about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a business’s debt levels is to consider its cash flow and debt together.
See our latest review for Magic Software Enterprises
What is Magic Software Enterprises’ net debt?
You can click on the graph below for the historical figures, but it shows that in September 2021, Magic Software Enterprises had a debt of US $ 43.1 million, an increase of US $ 28.8 million, over a year. But on the other hand, it also has $ 98.6 million in cash, which leads to a net cash position of $ 55.5 million.
How healthy is Magic Software Enterprises’ balance sheet?
According to the latest published balance sheet, Magic Software Enterprises had liabilities of US $ 95.6 million due within 12 months and liabilities of US $ 80.9 million due beyond 12 months. In return, he had $ 98.6 million in cash and $ 134.2 million in receivables due within 12 months. He can therefore avail himself of $ 56.3 million in liquid assets more than total Liabilities.
This short-term liquidity is a sign that Magic Software Enterprises could probably repay its debt easily, as its balance sheet is far from tight. In short, Magic Software Enterprises has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt!
Also positive, Magic Software Enterprises has increased its EBIT by 28% over the past year, which should make it easier to pay down debt going forward. 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 Magic Software Enterprises’ 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 Magic Software Enterprises 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 is. builds (or erodes) that cash balance. Over the past three years, Magic Software Enterprises has generated very robust free cash flow of 100% of its EBIT, more than we expected. This positions it well to repay debt if it is desirable.
As much as we sympathize with investors who find debt worrying, you should keep in mind that Magic Software Enterprises has US $ 55.5 million in net cash, plus more liquid assets than liabilities. . And he impressed us with free cash flow of US $ 41 million, or 100% of his EBIT. So is Magic Software Enterprises’ debt a risk? It does not seem to us. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Magic Software Enterprises you should know.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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