Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Workday, Inc. (NASDAQ:WDAY) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. 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 think about a company's use of debt, we first look at cash and debt together.
What Is Workday's Net Debt?
As you can see below, Workday had US$1.22b of debt at April 2019, down from US$1.51b a year prior. But on the other hand it also has US$1.89b in cash, leading to a US$673.0m net cash position.
How Strong Is Workday's Balance Sheet?
According to the last reported balance sheet, Workday had liabilities of US$2.44b due within 12 months, and liabilities of US$1.34b due beyond 12 months. Offsetting these obligations, it had cash of US$1.89b as well as receivables valued at US$542.8m due within 12 months. So its liabilities total US$1.34b more than the combination of its cash and short-term receivables.
Of course, Workday has a titanic market capitalization of US$43.4b, 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. Despite its noteworthy liabilities, Workday boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Workday can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Workday reported revenue of US$3.0b, which is a gain of 33%. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Workday?
Although Workday had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$402m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Workday 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. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Workday insider transactions.
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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