Workday (NASDAQ:WDAY) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Workday, Inc. (NASDAQ:WDAY) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Workday

How Much Debt Does Workday Carry?

As you can see below, Workday had US$2.98b of debt, at April 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$7.18b in cash offsetting this, leading to net cash of US$4.20b.

A Look At Workday's Liabilities

Zooming in on the latest balance sheet data, we can see that Workday had liabilities of US$4.43b due within 12 months and liabilities of US$3.35b due beyond that. Offsetting these obligations, it had cash of US$7.18b as well as receivables valued at US$1.13b due within 12 months. So it actually has US$537.0m more liquid assets than total liabilities.

Having regard to Workday's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$61.9b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Workday boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Workday turned things around in the last 12 months, delivering and EBIT of US$267m. 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 Workday 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. Workday 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 last year, Workday actually produced more free cash flow than EBIT. 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 investigate a company's debt, in this case Workday has US$4.20b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$2.0b, being 746% of its EBIT. So we don't think Workday's use of debt is risky. Another factor that would give us confidence in Workday would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.