These 4 Measures Indicate That Salesforce (NYSE:CRM) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Salesforce, Inc. (NYSE:CRM) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Salesforce

How Much Debt Does Salesforce Carry?

The image below, which you can click on for greater detail, shows that Salesforce had debt of US$9.42b at the end of July 2023, a reduction from US$10.6b over a year. However, its balance sheet shows it holds US$12.4b in cash, so it actually has US$2.97b net cash.

How Healthy Is Salesforce's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Salesforce had liabilities of US$20.8b due within 12 months and liabilities of US$13.6b due beyond that. Offsetting these obligations, it had cash of US$12.4b as well as receivables valued at US$5.40b due within 12 months. So its liabilities total US$16.6b more than the combination of its cash and short-term receivables.

Since publicly traded Salesforce shares are worth a very impressive total of US$198.2b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Salesforce boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Salesforce grew its EBIT by 3,228% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Salesforce 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. 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$2.97b. The cherry on top was that in converted 339% of that EBIT to free cash flow, bringing in US$7.6b. So we don't think Salesforce's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Salesforce that you should be aware of.

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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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.