Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that salesforce.com, inc. (NYSE:CRM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does salesforce.com Carry?
As you can see below, salesforce.com had US$2.97b of debt at July 2019, down from US$4.40b a year prior. But on the other hand it also has US$6.04b in cash, leading to a US$3.07b net cash position.
How Healthy Is salesforce.com's Balance Sheet?
We can see from the most recent balance sheet that salesforce.com had liabilities of US$10.2b falling due within a year, and liabilities of US$5.98b due beyond that. Offsetting these obligations, it had cash of US$6.04b as well as receivables valued at US$2.60b due within 12 months. So its liabilities total US$7.53b more than the combination of its cash and short-term receivables.
Given salesforce.com has a humongous market capitalization of US$130.8b, it's hard to believe these liabilities pose much threat. 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, salesforce.com boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that salesforce.com has increased its EBIT by 2.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine salesforce.com'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. salesforce.com may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, salesforce.com actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While it is always sensible to look at a company's total liabilities, it is very reassuring that salesforce.com has US$3.07b in net cash. And it impressed us with free cash flow of US$3.2b, being 529% of its EBIT. So we don't think salesforce.com's use of debt is risky. We'd be motivated to research the stock further if we found out that salesforce.com insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
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.
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