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. Importantly, Accenture plc (NYSE:ACN) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Accenture’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that Accenture had US$60.3m of debt in May 2022, down from US$70.8m, one year before. However, its balance sheet shows it holds US$6.71b in cash, so it actually has US$6.65b net cash.
How Healthy Is Accenture’s Balance Sheet?
The latest balance sheet data shows that Accenture had liabilities of US$16.6b due within a year, and liabilities of US$7.52b falling due after that. On the other hand, it had cash of US$6.71b and US$12.2b worth of receivables due within a year. So its liabilities total US$5.16b more than the combination of its cash and short-term receivables.
Given Accenture has a humongous market capitalization of US$169.9b, it’s hard to believe these liabilities pose much threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Accenture boasts net cash, so it’s fair to say it does not have a heavy debt load!
Also positive, Accenture grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. 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 Accenture can strengthen its balance sheet over time.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Accenture 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, Accenture actually produced more free cash flow than EBIT. 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 Accenture’s liabilities, but we can be reassured by the fact it has has net cash of US$6.65b. And it impressed us with free cash flow of US$7.4b, being 101% of its EBIT. So we don’t think Accenture’s use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing,