Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Intuit Inc. (NASDAQ:INTU) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Intuit’s Net Debt?
As you can see below, Intuit had US$423.0m of debt, at October 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have US$2.26b in cash offsetting this, leading to net cash of US$1.83b.
How Healthy Is Intuit’s Balance Sheet?
The latest balance sheet data shows that Intuit had liabilities of US$1.76b due within a year, and liabilities of US$793.0m falling due after that. On the other hand, it had cash of US$2.26b and US$286.0m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that Intuit’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it’s hard to imagine that the US$66.8b company is struggling for cash, we still think it’s worth monitoring its balance sheet. While it does have liabilities worth noting, Intuit also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Also good is that Intuit grew its EBIT at 18% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Intuit can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, Intuit 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.
While it is always sensible to look at a company’s total liabilities, it is very reassuring that Intuit has US$1.83b in net cash. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in US$2.2b. So we don’t think Intuit’s use of debt is risky. We’d be very excited to see if Intuit insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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