Is ServiceNow (NYSE:NOW) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that ServiceNow, Inc. (NYSE:NOW) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ServiceNow

What Is ServiceNow's Debt?

You can click the graphic below for the historical numbers, but it shows that ServiceNow had US$1.49b of debt in March 2023, down from US$1.57b, one year before. However, it does have US$4.91b in cash offsetting this, leading to net cash of US$3.43b.

A Look At ServiceNow's Liabilities

The latest balance sheet data shows that ServiceNow had liabilities of US$5.76b due within a year, and liabilities of US$2.25b falling due after that. Offsetting these obligations, it had cash of US$4.91b as well as receivables valued at US$1.11b due within 12 months. So its liabilities total US$1.99b more than the combination of its cash and short-term receivables.

Having regard to ServiceNow's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$115.2b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, ServiceNow boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that ServiceNow has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. 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 ServiceNow 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. ServiceNow may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, ServiceNow actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that ServiceNow has US$3.43b in net cash. And it impressed us with free cash flow of US$2.1b, being 623% of its EBIT. So we don't think ServiceNow's use of debt is risky. 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. We've identified 1 warning sign with ServiceNow , and understanding them should be part of your investment process.

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.