These 4 Measures Indicate That Accenture (NYSE:ACN) Is Using Debt Safely

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.' 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 Accenture plc (NYSE:ACN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Accenture

How Much Debt Does Accenture Carry?

You can click the graphic below for the historical numbers, but it shows that as of February 2021 Accenture had US$68.4m of debt, an increase on US$19.9m, over one year. But it also has US$9.17b in cash to offset that, meaning it has US$9.10b net cash.

How Healthy Is Accenture's Balance Sheet?

According to the last reported balance sheet, Accenture had liabilities of US$14.1b due within 12 months, and liabilities of US$7.05b due beyond 12 months. On the other hand, it had cash of US$9.17b and US$8.73b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.25b.

Having regard to Accenture's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$168.6b company is short on cash, but still worth keeping an eye on the 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.

The good news is that Accenture has increased its EBIT by 3.9% over twelve months, which should ease any concerns about debt repayment. 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 Accenture 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Accenture actually produced more free cash flow than EBIT over the last three years. 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 Accenture's liabilities, but we can be reassured by the fact it has has net cash of US$9.10b. And it impressed us with free cash flow of US$9.5b, being 110% of its EBIT. So we don't think Accenture's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Accenture's earnings per share history for free.

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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