Is Autodesk (NASDAQ:ADSK) A Risky Investment?

editorial-team@simplywallst.com (Simply Wall St)

Sun, Oct 1, 2023, 5:00 AM 4 min read

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.' 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. As with many other companies Autodesk, Inc. (NASDAQ:ADSK) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Autodesk

What Is Autodesk's Net Debt?

The image below, which you can click on for greater detail, shows that Autodesk had debt of US$2.28b at the end of July 2023, a reduction from US$2.63b over a year. However, because it has a cash reserve of US$2.07b, its net debt is less, at about US$209.0m.

debt-equity-history-analysis — NasdaqGS:ADSK Debt to Equity History October 1st 2023

How Strong Is Autodesk's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Autodesk had liabilities of US$3.88b due within 12 months and liabilities of US$4.03b due beyond that. On the other hand, it had cash of US$2.07b and US$402.0m worth of receivables due within a year. So it has liabilities totalling US$5.43b more than its cash and near-term receivables, combined.

Of course, Autodesk has a titanic market capitalization of US$44.2b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Autodesk has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Autodesk's net debt is only 0.19 times its EBITDA. And its EBIT covers its interest expense a whopping 95.3 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also good is that Autodesk grew its EBIT at 19% over the last year, further increasing its ability to manage debt. 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 Autodesk's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Autodesk 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.

Our View

Happily, Autodesk's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Overall, we don't think Autodesk is taking any bad risks, as its debt load seems modest. So the balance sheet looks pretty healthy, to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Autodesk you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.