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

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. We note that Accenture plc (NYSE:ACN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Accenture

What Is Accenture's Debt?

As you can see below, at the end of August 2024, Accenture had US$1.02b of debt, up from US$147.9m a year ago. Click the image for more detail. But it also has US$5.01b in cash to offset that, meaning it has US$3.99b net cash.

How Strong Is Accenture's Balance Sheet?

The latest balance sheet data shows that Accenture had liabilities of US$19.0b due within a year, and liabilities of US$7.79b falling due after that. Offsetting this, it had US$5.01b in cash and US$13.7b in receivables that were due within 12 months. So it has liabilities totalling US$8.09b more than its cash and near-term receivables, combined.

Given Accenture has a humongous market capitalization of US$224.1b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

While Accenture doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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$3.99b. And it impressed us with free cash flow of US$8.6b, being 90% of its EBIT. So is Accenture's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Accenture 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.