Is Guidewire Software (NYSE:GWRE) Using Debt Sensibly?

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.' 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 note that Guidewire Software, Inc. (NYSE:GWRE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Net Debt?

The chart below, which you can click on for greater detail, shows that Guidewire Software had US$398.5m in debt in April 2024; about the same as the year before. But it also has US$782.3m in cash to offset that, meaning it has US$383.8m net cash.

How Healthy Is Guidewire Software's Balance Sheet?

We can see from the most recent balance sheet that Guidewire Software had liabilities of US$704.8m falling due within a year, and liabilities of US$49.9m due beyond that. On the other hand, it had cash of US$782.3m and US$229.9m worth of receivables due within a year. So it can boast US$257.5m more liquid assets than total liabilities.

This surplus suggests that Guidewire Software has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Guidewire Software wasn't profitable at an EBIT level, but managed to grow its revenue by 9.0%, to US$959m. 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?

Although Guidewire Software had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$155m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. 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, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com