David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ 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. Importantly, Salesforce, Inc. (NYSE:CRM) does carry debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.
Check out our latest analysis for Salesforce
What Is Salesforce’s Debt?
As you can see below, at the end of April 2022, Salesforce had US$10.6b of debt, up from US$2.68b a year ago. Click the image for more detail. But it also has US$13.5b in cash to offset that, meaning it has US$2.91b net cash.
NYSE:CRM Debt to Equity History June 22nd 2022
How Strong Is Salesforce’s Balance Sheet?
According to the last reported balance sheet, Salesforce had liabilities of US$19.9b due within 12 months, and liabilities of US$14.2b due beyond 12 months. Offsetting these obligations, it had cash of US$13.5b as well as receivables valued at US$3.95b due within 12 months. So its liabilities total US$16.7b more than the combination of its cash and short-term receivables.
Given Salesforce has a humongous market capitalization of US$166.0b, it’s hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Salesforce boasts net cash, so it’s fair to say it does not have a heavy debt load!
Shareholders should be aware that Salesforce’s EBIT was down 72% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Salesforce’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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Salesforce 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, Salesforce actually produced more free cash flow than EBIT over the last three years. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
Summing up
Although Salesforce’s balance sheet isn’t particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$2.91b. The cherry on top was that in converted 1,077% of that EBIT to free cash flow, bringing in US$5.7b. So we are not troubled with Salesforce’s debt use. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. Be aware that Salesforce is showing 5 warning signs in our investment analysis , you should know about…
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.
