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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Accenture plc (NYSE:ACN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Accenture
How Much Debt Does Accenture Carry?
As you can see below, Accenture had US$24.0m of debt at May 2019, down from US$28.8m a year prior. But on the other hand it also has US$4.77b in cash, leading to a US$4.75b net cash position.
A Look At Accenture's Liabilities
We can see from the most recent balance sheet that Accenture had liabilities of US$10.6b falling due within a year, and liabilities of US$3.46b due beyond that. Offsetting this, it had US$4.77b in cash and US$8.13b in receivables that were due within 12 months. So it has liabilities totalling US$1.11b more than its cash and near-term receivables, combined.
This state of affairs indicates that Accenture's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$121.6b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Accenture boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Accenture grew its EBIT by 8.8% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Accenture 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Accenture 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, Accenture recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.