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. We note that Workday, Inc. (NASDAQ:WDAY) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Workday’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that Workday had US$2.98b of debt in July 2023, down from US$4.12b, one year before. However, it does have US$6.66b in cash offsetting this, leading to net cash of US$3.68b.
A Look At Workday’s Liabilities
The latest balance sheet data shows that Workday had liabilities of US$4.18b due within a year, and liabilities of US$3.28b falling due after that. On the other hand, it had cash of US$6.66b and US$1.27b worth of receivables due within a year. So it actually has US$467.3m more liquid assets than total liabilities.
Having regard to Workday’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$62.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Workday boasts net cash, so it’s fair to say it does not have a heavy debt load! 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 Workday can strengthen its balance sheet over time.
In the last year Workday wasn’t profitable at an EBIT level, but managed to grow its revenue by 18%, to US$6.7b. We usually like to see faster growth from unprofitable companies, but each to their own.
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$1.5b. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. We’ll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There’s no doubt that we learn most about debt from the balance sheet.