Health Check: How Prudently Does Guidewire Software (NYSE:GWRE) Use 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.' 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. As with many other companies Guidewire Software, Inc. (NYSE:GWRE) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Guidewire Software

What Is Guidewire Software's Debt?

You can click the graphic below for the historical numbers, but it shows that as of April 2023 Guidewire Software had US$396.7m of debt, an increase on US$354.5m, over one year. However, its balance sheet shows it holds US$687.8m in cash, so it actually has US$291.1m net cash.

A Look At Guidewire Software's Liabilities

The latest balance sheet data shows that Guidewire Software had liabilities of US$275.4m due within a year, and liabilities of US$446.0m falling due after that. Offsetting this, it had US$687.8m in cash and US$257.2m in receivables that were due within 12 months. So it actually has US$223.6m 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$880m, which is a gain of 10%, 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$67m of cash and made a loss of US$155m. With only US$291.1m on the balance sheet, it would appear that its going to need to raise capital again 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. 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. Case in point: We've spotted 1 warning sign for Guidewire Software 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.