ServiceNow (NYSE:NOW) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that ServiceNow, Inc. (NYSE:NOW) does use debt in its business. But the real question is whether this debt is making the company risky.

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for ServiceNow

How Much Debt Does ServiceNow Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 ServiceNow had US$1.58b of debt, an increase on US$696.1m, over one year. But on the other hand it also has US$2.98b in cash, leading to a US$1.40b net cash position.

How Strong Is ServiceNow's Balance Sheet?

According to the last reported balance sheet, ServiceNow had liabilities of US$3.91b due within 12 months, and liabilities of US$2.00b due beyond 12 months. Offsetting this, it had US$2.98b in cash and US$781.0m in receivables that were due within 12 months. So it has liabilities totalling US$2.15b more than its cash and near-term receivables, combined.

This state of affairs indicates that ServiceNow'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$129.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, ServiceNow boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that ServiceNow grew its EBIT at 19% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ServiceNow'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about ServiceNow's liabilities, but we can be reassured by the fact it has has net cash of US$1.40b. The cherry on top was that in converted 605% of that EBIT to free cash flow, bringing in US$1.5b. So is ServiceNow's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 5 warning signs for ServiceNow you should be aware of.

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.
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