Is Guidewire Software (NYSE:GWRE) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Guidewire Software, Inc. (NYSE:GWRE) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Guidewire Software

How Much Debt Does Guidewire Software Carry?

As you can see below, at the end of July 2023, Guidewire Software had US$397.2m of debt, up from US$358.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$816.4m in cash, so it actually has US$419.2m net cash.

How Healthy Is Guidewire Software's Balance Sheet?

The latest balance sheet data shows that Guidewire Software had liabilities of US$373.3m due within a year, and liabilities of US$455.2m falling due after that. Offsetting this, it had US$816.4m in cash and US$238.8m in receivables that were due within 12 months. So it actually has US$226.7m 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. Succinctly put, Guidewire Software boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Guidewire Software wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to US$905m. 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?

While Guidewire Software lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$21m. 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Guidewire Software you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.