Salesforce (NYSE:CRM) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Salesforce, Inc. (NYSE:CRM) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Salesforce

What Is Salesforce's Debt?

You can click the graphic below for the historical numbers, but it shows that Salesforce had US$8.43b of debt in October 2024, down from US$9.43b, one year before. But on the other hand it also has US$12.8b in cash, leading to a US$4.33b net cash position.

How Strong Is Salesforce's Balance Sheet?

According to the last reported balance sheet, Salesforce had liabilities of US$19.4b due within 12 months, and liabilities of US$13.5b due beyond 12 months. Offsetting these obligations, it had cash of US$12.8b as well as receivables valued at US$4.74b due within 12 months. So its liabilities total US$15.4b more than the combination of its cash and short-term receivables.

Of course, Salesforce has a titanic market capitalization of US$292.7b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Salesforce boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Salesforce has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Salesforce 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Salesforce 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. Over the last three years, Salesforce 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

We could understand if investors are concerned about Salesforce's liabilities, but we can be reassured by the fact it has has net cash of US$4.33b. The cherry on top was that in converted 198% of that EBIT to free cash flow, bringing in US$12b. So we don't think Salesforce's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Salesforce has 1 warning sign we think you should be aware of.

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.