Microsoft (NASDAQ:MSFT) Seems To Use Debt Rather Sparingly

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. We can see that Microsoft Corporation (NASDAQ:MSFT) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Microsoft

What Is Microsoft's Debt?

As you can see below, at the end of September 2023, Microsoft had US$71.5b of debt, up from US$48.6b a year ago. Click the image for more detail. But it also has US$143.9b in cash to offset that, meaning it has US$72.4b net cash.

A Look At Microsoft's Liabilities

We can see from the most recent balance sheet that Microsoft had liabilities of US$124.8b falling due within a year, and liabilities of US$100.3b due beyond that. On the other hand, it had cash of US$143.9b and US$47.2b worth of receivables due within a year. So it has liabilities totalling US$34.0b more than its cash and near-term receivables, combined.

Having regard to Microsoft'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$2.96t company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Also good is that Microsoft grew its EBIT at 12% over the last year, further increasing its ability to manage debt. 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 Microsoft 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Microsoft 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 most recent three years, Microsoft recorded free cash flow worth 74% 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$72.4b. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in US$63b. So we don't think Microsoft's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Microsoft that 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.