These 4 Measures Indicate That Salesforce (NYSE:CRM) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Salesforce, Inc. (NYSE:CRM) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Salesforce

What Is Salesforce's Net Debt?

As you can see below, Salesforce had US$8.43b of debt at July 2024, down from US$9.42b a year prior. But on the other hand it also has US$12.6b in cash, leading to a US$4.21b net cash position.

A Look At Salesforce's Liabilities

We can see from the most recent balance sheet that Salesforce had liabilities of US$21.0b falling due within a year, and liabilities of US$13.5b due beyond that. Offsetting these obligations, it had cash of US$12.6b as well as receivables valued at US$5.39b due within 12 months. So it has liabilities totalling US$16.5b more than its cash and near-term receivables, combined.

Of course, Salesforce has a titanic market capitalization of US$309.2b, 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!

On top of that, Salesforce grew its EBIT by 62% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Salesforce's ability to maintain a healthy balance sheet going forward. 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. 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 Salesforce's liabilities, but we can be reassured by the fact it has has net cash of US$4.21b. And it impressed us with free cash flow of US$11b, being 217% of its EBIT. So we don't think Salesforce's use of debt is risky. We'd be very excited to see if Salesforce insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.