Does Salesforce (NYSE:CRM) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Salesforce, Inc. (NYSE:CRM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Salesforce

How Much Debt Does Salesforce Carry?

As you can see below, Salesforce had US$9.43b of debt at January 2024, down from US$10.6b a year prior. But on the other hand it also has US$14.2b in cash, leading to a US$4.77b net cash position.

A Look At Salesforce's Liabilities

According to the last reported balance sheet, Salesforce had liabilities of US$26.6b due within 12 months, and liabilities of US$13.5b due beyond 12 months. Offsetting these obligations, it had cash of US$14.2b as well as receivables valued at US$11.4b due within 12 months. So it has liabilities totalling US$14.6b more than its cash and near-term receivables, combined.

Given Salesforce has a humongous market capitalization of US$266.9b, 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. While it does have liabilities worth noting, Salesforce also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Salesforce grew its EBIT by 223% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last three years, Salesforce actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Salesforce's liabilities, but we can be reassured by the fact it has has net cash of US$4.77b. The cherry on top was that in converted 251% of that EBIT to free cash flow, bringing in US$9.5b. So we don't think Salesforce's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Salesforce that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.