ServiceNow (NYSE:NOW) Has A Rock Solid Balance Sheet

Warren Buffett famously said, '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 is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ServiceNow

How Much Debt Does ServiceNow Carry?

The chart below, which you can click on for greater detail, shows that ServiceNow had US$1.49b in debt in December 2023; about the same as the year before. However, it does have US$4.88b in cash offsetting this, leading to net cash of US$3.39b.

How Healthy Is ServiceNow's Balance Sheet?

According to the last reported balance sheet, ServiceNow had liabilities of US$7.37b due within 12 months, and liabilities of US$2.39b due beyond 12 months. Offsetting this, it had US$4.88b in cash and US$2.09b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.80b.

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$156.3b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, ServiceNow also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that ServiceNow grew its EBIT by 115% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. 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. Over the last three years, ServiceNow actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that ServiceNow has US$3.39b in net cash. And it impressed us with free cash flow of US$2.7b, being 486% of its EBIT. So we don't think ServiceNow's use of debt is risky. 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. For example - ServiceNow has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.