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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.' 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 can see that Intuit Inc. (NASDAQ:INTU) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
What Is Intuit's Debt?
The image below, which you can click on for greater detail, shows that at October 2020 Intuit had debt of US$2.36b, up from US$423.0m in one year. However, it does have US$5.79b in cash offsetting this, leading to net cash of US$3.44b.
A Look At Intuit's Liabilities
The latest balance sheet data shows that Intuit had liabilities of US$2.15b due within a year, and liabilities of US$2.31b falling due after that. Offsetting this, it had US$5.79b in cash and US$154.0m in receivables that were due within 12 months. So it can boast US$1.49b more liquid assets than total liabilities.
Having regard to Intuit's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$103.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Intuit has more cash than debt is arguably a good indication that it can manage its debt safely.
Also positive, Intuit grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Intuit 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Intuit 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 three years, Intuit actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While we empathize with investors who find debt concerning, you should keep in mind that Intuit has net cash of US$3.44b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$2.4b, being 113% of its EBIT. So we don't think Intuit's use of debt is risky. 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. Case in point: We've spotted 3 warning signs for Intuit you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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. 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.
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