Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Workday, Inc. (NASDAQ:WDAY) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

What Is Workday's Debt?

The chart below, which you can click on for greater detail, shows that Workday had US$2.98b in debt in July 2024; about the same as the year before. However, its balance sheet shows it holds US$7.37b in cash, so it actually has US$4.39b net cash.

How Strong Is Workday's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Workday had liabilities of US$4.51b due within 12 months and liabilities of US$3.38b due beyond that. On the other hand, it had cash of US$7.37b and US$1.34b worth of receivables due within a year. So it can boast US$820.0m 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 while it's hard to imagine that the US$67.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Workday has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Workday made a loss at the EBIT level, last year, it was also good to see that it generated US$342m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Workday'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. Workday 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 year, Workday actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Workday has net cash of US$4.39b, as well as more liquid assets than liabilities. The cherry on top was that in converted 628% of that EBIT to free cash flow, bringing in US$2.1b. So is Workday's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Workday would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.