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Does Atlassian (NASDAQ:TEAM) Have A Healthy Balance Sheet?

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Atlassian Corporation Plc (NASDAQ:TEAM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Atlassian

What Is Atlassian's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Atlassian had debt of US$999.4m, up from US$542.1m in one year. But it also has US$1.28b in cash to offset that, meaning it has US$281.6m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Atlassian's Liabilities

The latest balance sheet data shows that Atlassian had liabilities of US$1.42b due within a year, and liabilities of US$1.40b falling due after that. Offsetting these obligations, it had cash of US$1.28b as well as receivables valued at US$264.2m due within 12 months. So it has liabilities totalling US$1.28b more than its cash and near-term receivables, combined.

Of course, Atlassian has a titanic market capitalization of US$46.0b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Atlassian also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Atlassian'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.

Over 12 months, Atlassian reported revenue of US$2.6b, which is a gain of 33%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Atlassian?

Although Atlassian had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$777m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that Atlassian is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Atlassian you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.