David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Mostly, ServiceNow, Inc. (NYSE: NOW) bears the debt. But does this debt concern shareholders?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
What is ServiceNow Debt?
The graph below, which you can click for more details, shows that ServiceNow had $ 696.1 million in debt as of June 2020; about the same as the year before. But on the other hand, it also has $ 2.34 billion in cash, which leads to a net cash position of $ 1.65 billion.
How healthy is ServiceNow’s track record?
The latest balance sheet data shows that ServiceNow had $ 2.85 billion in liabilities due within one year, and $ 1.19 billion in liabilities due after that. In compensation for these obligations, he had cash of US $ 2.34 billion as well as receivables valued at US $ 642.0 million due within 12 months. It therefore has liabilities totaling US $ 1.06 billion more than its cash and short-term receivables combined.
Considering the size of ServiceNow, it appears that its liquid assets are well balanced with its total liabilities. So the $ 97.0 billion company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. Despite its notable liabilities, ServiceNow has crisp cash flow, so it’s fair to say it doesn’t have a lot of debt!
It was also good to see that despite losing money on the EBIT line last year, ServiceNow has turned things around over the past 12 months, delivering EBIT of US $ 196 million. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine ServiceNow’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. ServiceNow may have net cash on the balance sheet, but it’s always interesting to consider how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Fortunately for all shareholders, ServiceNow actually generated more free cash flow than EBIT over the past year. There is nothing better than cash flow to stay in the good graces of your lenders.
While it always makes sense to look at a company’s total liabilities, it’s very reassuring that ServiceNow has $ 1.65 billion in net cash. The icing on the cake was that he converted 553% of that EBIT into free cash flow, bringing in US $ 1.1 billion. So, is ServiceNow’s debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that ServiceNow is displayed 2 warning signs in our investment analysis , you must know…
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.