David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Cornerstone OnDemand, Inc. (NASDAQ:CSOD) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Cornerstone OnDemand Carry?
The chart below, which you can click on for greater detail, shows that Cornerstone OnDemand had US$293.2m in debt in December 2019; about the same as the year before. However, its balance sheet shows it holds US$417.5m in cash, so it actually has US$124.3m net cash.
A Look At Cornerstone OnDemand's Liabilities
Zooming in on the latest balance sheet data, we can see that Cornerstone OnDemand had liabilities of US$439.7m due within 12 months and liabilities of US$368.0m due beyond that. On the other hand, it had cash of US$417.5m and US$131.1m worth of receivables due within a year. So its liabilities total US$259.0m more than the combination of its cash and short-term receivables.
Of course, Cornerstone OnDemand has a market capitalization of US$1.95b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Cornerstone OnDemand boasts net cash, so it's fair to say it does not have a heavy debt load!
Pleasingly, Cornerstone OnDemand is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 424% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cornerstone OnDemand's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Cornerstone OnDemand has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Cornerstone OnDemand actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While Cornerstone OnDemand does have more liabilities than liquid assets, it also has net cash of US$124.3m. And it impressed us with free cash flow of US$73m, being 863% of its EBIT. So is Cornerstone OnDemand's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Cornerstone OnDemand that you should be aware of before investing here.
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.