Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Workday, Inc. (NASDAQ:WDAY) makes use of debt. But the real question is whether this debt is making the company risky.
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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Workday's Debt?
The image below, which you can click on for greater detail, shows that at July 2022 Workday had debt of US$4.12b, up from US$1.86b in one year. However, it does have US$6.29b in cash offsetting this, leading to net cash of US$2.17b.
How Healthy Is Workday's Balance Sheet?
According to the last reported balance sheet, Workday had liabilities of US$4.86b due within 12 months, and liabilities of US$3.26b due beyond 12 months. Offsetting these obligations, it had cash of US$6.29b as well as receivables valued at US$1.11b due within 12 months. So its liabilities total US$723.5m more than the combination of its cash and short-term receivables.
This state of affairs indicates that Workday's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$37.9b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Workday also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Workday'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.
In the last year Workday wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to US$5.7b. With any luck the company will be able to grow its way to profitability.
So How Risky Is Workday?
Although Workday had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$1.2b. 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. One positive is that Workday is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock 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. Case in point: We've spotted 2 warning signs for Workday 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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