David Iben put it very well when he said: “Volatility is not a risk we care about. What we care about is avoiding permanent loss of capital.” So when considering the risk of any given stock, it is clear that you Need to consider debt, because too much debt will sink the company. important, ServiceNow, Inc. (NYSE:NOW) It is indeed in debt. But will this debt attract the attention of shareholders?
When is the debt problematic?
Generally speaking, debt becomes a real problem only when the company cannot easily repay debt by raising funds or having its own cash flow. If the situation is really bad, the lender can control the business. Although this situation is not very common, we often see debt-laden companies permanently diluting the interests of shareholders because lenders force them to raise funds at discounted prices. Of course, the advantage of debt is that it usually represents cheap capital, especially when it replaces diluted assets in companies that can reinvest at high rates of return. When considering how much debt a company uses, the first thing to do is to look at its cash and debt together.
View our latest analysis of ServiceNow
What is ServiceNow’s debt?
You can click on the table below for more detailed information, which shows that ServiceNow’s debt in June 2020 was $669.1 million. It is about the same as the previous year. But on the other hand, it also has $234 million in cash, resulting in a net cash position of $1.65 billion.
How healthy is ServiceNow’s balance sheet?
The latest balance sheet data shows that ServiceNow’s liabilities are US$2.85b within one year, and US$1.19b should be due after that. To offset these debts, it has $234 million in cash and $642 million in receivables due within 12 months. As a result, its liabilities totaled $106 million more than the sum of its cash and short-term accounts receivable.
Taking into account the size of ServiceNow, it seems that its current assets and total liabilities have maintained a good balance. Therefore, this $9.7 billion company is unlikely to lack cash, but it is still worth paying attention to its balance sheet. Despite many debts, ServiceNow has net cash, so it can be said that it does not have a heavy debt burden!
Happily, despite last year’s EBIT loss, ServiceNow has reversed the situation in the past 12 months and achieved EBIT of US$196 million. The balance sheet is obviously the area you want to focus on when analyzing debt. However, future earnings, not the most important, will determine ServiceNow’s ability to maintain a healthy balance sheet in the future.So if you focus on the future, you can check this free The report shows the analyst’s profit forecast.
But our final consideration is also very important, because the company cannot use paper profits to repay debt. It requires hard cash. ServiceNow may have net cash on the balance sheet, but it is still interesting to see how well companies convert their earnings before interest and taxes (EBIT) into free cash flow, as this will affect their needs and capabilities. Manage debt. For any shareholder, it is gratifying that ServiceNow has actually generated more free cash flow than EBIT in the past year. There is nothing better than receiving cash to keep the lender’s good treatment.
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Although it is always wise to look at the company’s total liabilities, it is reassuring that ServiceNow has $165 million in net cash. Most importantly, EBIT converted 553% of free cash flow, bringing in $1.1b. So is ServiceNow’s debt at risk? In our opinion, this is not the case. There is no doubt that we know the most debt from the balance sheet. But in the end, every company may include risks that exist outside the balance sheet.Note that ServiceNow is displaying There are 2 warning signs in our investment analysis , You should know…
If you are interested in investing in a business that can increase profits without increasing debt burden, please check this free A list of growing companies with net cash on the balance sheet.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, nor does it consider your goals or financial situation. We aim to bring you long-term focused analysis driven by basic data. Please note that our analysis may not consider the latest announcements or qualitative materials from price-sensitive companies. Simply put, Wall Street has no position in any of the stocks mentioned.
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