Microsoft (NASDAQ:MSFT) Has A Rock Solid Balance Sheet

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. Importantly, Microsoft Corporation (NASDAQ:MSFT) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Microsoft

What Is Microsoft's Debt?

You can click the graphic below for the historical numbers, but it shows that Microsoft had US$48.1b of debt in December 2022, down from US$53.3b, one year before. However, its balance sheet shows it holds US$99.5b in cash, so it actually has US$51.4b net cash.

A Look At Microsoft's Liabilities

According to the last reported balance sheet, Microsoft had liabilities of US$81.7b due within 12 months, and liabilities of US$99.7b due beyond 12 months. On the other hand, it had cash of US$99.5b and US$35.8b worth of receivables due within a year. So its liabilities total US$46.1b more than the combination of its cash and short-term receivables.

Of course, Microsoft has a titanic market capitalization of US$2.14t, 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. While it does have liabilities worth noting, Microsoft also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Microsoft grew its EBIT by 6.3% in the last year, making that debt load look even more manageable. 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 Microsoft's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Microsoft 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. Over the most recent three years, Microsoft recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Microsoft's liabilities, but we can be reassured by the fact it has has net cash of US$51.4b. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in US$60b. So we don't think Microsoft's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Microsoft you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.