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

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.' 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. Importantly, Guidewire Software, Inc. (NYSE:GWRE) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Guidewire Software's Debt?

As you can see below, at the end of January 2025, Guidewire Software had US$851.8m of debt, up from US$398.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$1.17b in cash, so it actually has US$317.2m net cash.

How Healthy Is Guidewire Software's Balance Sheet?

The latest balance sheet data shows that Guidewire Software had liabilities of US$558.7m due within a year, and liabilities of US$715.4m falling due after that. Offsetting this, it had US$1.17b in cash and US$237.5m in receivables that were due within 12 months. So it actually has US$132.4m more liquid assets than total liabilities.

This state of affairs indicates that Guidewire Software's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$17.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Guidewire Software has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Guidewire Software's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

View our latest analysis for Guidewire Software

In the last year Guidewire Software wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to US$1.1b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Guidewire Software?

While Guidewire Software lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$205m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Guidewire Software you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.