Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Salesforce, Inc. (NYSE:CRM) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Salesforce's Debt?
The image below, which you can click on for greater detail, shows that Salesforce had debt of US$10.6b at the end of July 2022, a reduction from US$11.9b over a year. However, it does have US$13.5b in cash offsetting this, leading to net cash of US$2.93b.
A Look At Salesforce's Liabilities
According to the last reported balance sheet, Salesforce had liabilities of US$20.1b due within 12 months, and liabilities of US$14.0b due beyond 12 months. Offsetting this, it had US$13.5b in cash and US$4.75b in receivables that were due within 12 months. So it has liabilities totalling US$15.8b more than its cash and near-term receivables, combined.
Since publicly traded Salesforce shares are worth a very impressive total of US$146.9b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Salesforce also has more cash than debt, so we're pretty confident it can manage its debt safely.
Importantly, Salesforce's EBIT fell a jaw-dropping 88% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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.
While Salesforce does have more liabilities than liquid assets, it also has net cash of US$2.93b. And it impressed us with free cash flow of US$5.7b, being 1,092% of its EBIT. So we don't have any problem with Salesforce's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Salesforce you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
What are the risks and opportunities for Salesforce?
Trading at 43.6% below our estimate of its fair value
Earnings are forecast to grow 45.04% per year
Profit margins (0.9%) are lower than last year (7%)
Large one-off items impacting financial results
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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.
Salesforce, Inc. provides customer relationship management technology that brings companies and customers together worldwide.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
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Excellent balance sheet and good value.