Workday (NASDAQ:WDAY) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Workday, Inc. (NASDAQ:WDAY) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Workday

What Is Workday's Debt?

The chart below, which you can click on for greater detail, shows that Workday had US$2.98b in debt in October 2024; about the same as the year before. But it also has US$7.16b in cash to offset that, meaning it has US$4.17b net cash.

How Strong Is Workday's Balance Sheet?

The latest balance sheet data shows that Workday had liabilities of US$4.42b due within a year, and liabilities of US$3.38b falling due after that. Offsetting these obligations, it had cash of US$7.16b as well as receivables valued at US$1.45b due within 12 months. So it can boast US$809.0m 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 while it's hard to imagine that the US$68.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Workday boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Workday grew its EBIT by 2,649% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Workday's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Workday 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, Workday actually produced more free cash flow than EBIT over the last two years. 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$4.17b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$2.1b, being 851% of its EBIT. So is Workday's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Workday, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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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.