These 4 Measures Indicate That ServiceNow (NYSE:NOW) Is Using Debt Safely

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. Importantly, ServiceNow, Inc. (NYSE:NOW) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is ServiceNow's Debt?

The chart below, which you can click on for greater detail, shows that ServiceNow had US$1.49b in debt in June 2025; about the same as the year before. But it also has US$6.13b in cash to offset that, meaning it has US$4.64b net cash.

A Look At ServiceNow's Liabilities

The latest balance sheet data shows that ServiceNow had liabilities of US$8.50b due within a year, and liabilities of US$2.62b falling due after that. Offsetting these obligations, it had cash of US$6.13b as well as receivables valued at US$1.70b due within 12 months. So it has liabilities totalling US$3.29b more than its cash and near-term receivables, combined.

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$181.1b 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!

See our latest analysis for ServiceNow

In addition to that, we're happy to report that ServiceNow has boosted its EBIT by 50%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ServiceNow has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, ServiceNow actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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$4.64b. And it impressed us with free cash flow of US$3.8b, being 279% of its EBIT. So we don't think ServiceNow's use of debt is risky. We'd be very excited to see if ServiceNow insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.