Atlassian (NASDAQ:TEAM) Seems To Use Debt Rather Sparingly

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 Atlassian Corporation Plc (NASDAQ:TEAM) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Atlassian

What Is Atlassian's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Atlassian had US$348.8m of debt in June 2021, down from US$889.2m, one year before. However, its balance sheet shows it holds US$1.23b in cash, so it actually has US$883.4m net cash.

How Strong Is Atlassian's Balance Sheet?

The latest balance sheet data shows that Atlassian had liabilities of US$2.31b due within a year, and liabilities of US$340.4m falling due after that. Offsetting these obligations, it had cash of US$1.23b as well as receivables valued at US$183.4m due within 12 months. So its liabilities total US$1.23b more than the combination of its cash and short-term receivables.

This state of affairs indicates that Atlassian'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$103.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Atlassian boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Atlassian's EBIT launched higher than Elon Musk, gaining a whopping 682% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Atlassian can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Atlassian 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 last two years, Atlassian actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about Atlassian's liabilities, but we can be reassured by the fact it has has net cash of US$883.4m. The cherry on top was that in converted 1,084% of that EBIT to free cash flow, bringing in US$808m. So is Atlassian'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. For example - Atlassian has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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