Accenture (NYSE:ACN) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Accenture plc (NYSE:ACN) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Accenture

How Much Debt Does Accenture Carry?

As you can see below, Accenture had US$70.8m of debt, at May 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$10.0b in cash, leading to a US$9.94b net cash position.

How Healthy Is Accenture's Balance Sheet?

According to the last reported balance sheet, Accenture had liabilities of US$14.9b due within 12 months, and liabilities of US$7.30b due beyond 12 months. Offsetting this, it had US$10.0b in cash and US$9.47b in receivables that were due within 12 months. So its liabilities total US$2.74b more than the combination of its cash and short-term receivables.

Having regard to Accenture'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$186.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Accenture also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Accenture grew its EBIT at 10% over the last year, further increasing its ability to manage debt. 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 Accenture 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Accenture 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 three years, Accenture 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Accenture has US$9.94b in net cash. The cherry on top was that in converted 109% of that EBIT to free cash flow, bringing in US$9.2b. So we don't think Accenture's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Accenture, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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