Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Guidewire Software, Inc. (NYSE:GWRE) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Guidewire Software Carry?

As you can see below, Guidewire Software had US$398.9m of debt, at July 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.02b in cash to offset that, meaning it has US$622.5m net cash.

How Strong Is Guidewire Software's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guidewire Software had liabilities of US$837.6m due within 12 months and liabilities of US$45.9m due beyond that. Offsetting this, it had US$1.02b in cash and US$224.4m in receivables that were due within 12 months. So it can boast US$362.2m more liquid assets than total liabilities.

This surplus suggests that Guidewire Software has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Guidewire Software 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 Guidewire Software can strengthen its balance sheet over time. 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 Guidewire Software wasn't profitable at an EBIT level, but managed to grow its revenue by 8.3%, to US$980m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Guidewire Software?

While Guidewire Software lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$177m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Guidewire Software that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.