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salesforce.com (NYSE:CRM) Seems To Use Debt Quite Sensibly

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Simply Wall St
·4 min read
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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.' 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. As with many other companies salesforce.com, inc. (NYSE:CRM) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for salesforce.com

How Much Debt Does salesforce.com Carry?

As you can see below, salesforce.com had US$2.68b of debt, at January 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$12.0b in cash, leading to a US$9.29b net cash position.

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

A Look At salesforce.com's Liabilities

The latest balance sheet data shows that salesforce.com had liabilities of US$17.7b due within a year, and liabilities of US$7.08b falling due after that. Offsetting these obligations, it had cash of US$12.0b as well as receivables valued at US$7.79b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.06b.

Given salesforce.com has a humongous market capitalization of US$192.9b, it's hard to believe these liabilities pose much threat. 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, salesforce.com boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, salesforce.com saw its EBIT drop by 8.8% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that salesforce.com has US$9.29b in net cash. And it impressed us with free cash flow of US$4.1b, being 699% of its EBIT. So is salesforce.com'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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for salesforce.com you should be aware of, and 1 of them is significant.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

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