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.’ 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 note that Atlassian Corporation (NASDAQ:TEAM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Atlassian
What Is Atlassian’s Debt?
As you can see below, at the end of September 2022, Atlassian had US$999.5m of debt, up from US$923.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$1.54b in cash, so it actually has US$544.9m net cash.
A Look At Atlassian’s Liabilities
The latest balance sheet data shows that Atlassian had liabilities of US$1.50b due within a year, and liabilities of US$1.39b falling due after that. Offsetting these obligations, it had cash of US$1.54b as well as receivables valued at US$246.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.10b.
Of course, Atlassian has a titanic market capitalization of US$37.8b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Atlassian also has more cash than debt, so we’re pretty confident it can manage its debt safely. 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 Atlassian’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.
In the last year Atlassian wasn’t profitable at an EBIT level, but managed to grow its revenue by 34%, to US$3.0b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Atlassian?
Although Atlassian had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$827m. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. The good news for Atlassian shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn’t change our opinion that the stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. For instance, we’ve identified 3 warning signs for Atlassian that you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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