Health Check: How Prudently Does Guidewire Software (NYSE:GWRE) Use Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Guidewire Software, Inc. (NYSE:GWRE) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Guidewire Software

How Much Debt Does Guidewire Software Carry?

The image below, which you can click on for greater detail, shows that at October 2022 Guidewire Software had debt of US$395.9m, up from US$347.3m in one year. But it also has US$705.2m in cash to offset that, meaning it has US$309.3m net cash.

How Strong Is Guidewire Software's Balance Sheet?

According to the last reported balance sheet, Guidewire Software had liabilities of US$252.8m due within 12 months, and liabilities of US$510.6m due beyond 12 months. Offsetting these obligations, it had cash of US$705.2m as well as receivables valued at US$179.0m due within 12 months. So it can boast US$120.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Guidewire Software could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Guidewire Software has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Guidewire Software 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.

Over 12 months, Guidewire Software reported revenue of US$842m, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Guidewire Software?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Guidewire Software had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$37m of cash and made a loss of US$198m. Given it only has net cash of US$309.3m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Guidewire Software is showing 2 warning signs in our investment analysis , you should know about...

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.

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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.