NASDAQ:TEAM) does carry debt. But is this debt a concern to shareholders?” data-reactid=”28″>The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘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. Importantly, Atlassian Corporation Plc (NASDAQ:TEAM) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Atlassian ” data-reactid=”31″> See our latest analysis for Atlassian
What Is Atlassian’s Net Debt?
The image below, which you can click on for greater detail, shows that at June 2020 Atlassian had debt of US$889.2m, up from US$853.6m in one year. However, its balance sheet shows it holds US$2.16b in cash, so it actually has US$1.27b net cash.
How Healthy Is Atlassian’s Balance Sheet?
According to the last reported balance sheet, Atlassian had liabilities of US$3.02b due within 12 months, and liabilities of US$300.0m due beyond 12 months. Offsetting these obligations, it had cash of US$2.16b as well as receivables valued at US$128.2m due within 12 months. So its liabilities total US$1.0b more than the combination of its cash and short-term receivables.
Of course, Atlassian has a titanic market capitalization of US$42.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.
report showing analyst profit forecasts.” data-reactid=”53″>We also note that Atlassian improved its EBIT from a last year’s loss to a positive US$14m. When analysing debt levels, the balance sheet is the obvious place to start. 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Atlassian has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Atlassian actually produced more free cash flow than EBIT over the last year. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
Summing up
Atlassian is showing 1 warning sign in our investment analysis , you should know about…” data-reactid=”56″>While it is always sensible to look at a company’s total liabilities, it is very reassuring that Atlassian has US$1.27b in net cash. And it impressed us with free cash flow of US$539m, being 3,823% of its EBIT. So we are not troubled with Atlassian’s debt use. 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. Be aware that Atlassian is showing 1 warning sign in our investment analysis , you should know about…
our exclusive list of net cash growth stocks, today.” data-reactid=”61″>Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”62″>This article by Simply Wall St is general in nature. 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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