Yahoo Finance These 4 Measures Indicate That Atlassian (NASDAQ:TEAM) Is Using Debt Safely
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. Importantly, Atlassian Corporation Plc (NASDAQ:TEAM) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Atlassian
How Much Debt Does Atlassian Carry?
The image below, which you can click on for greater detail, shows that Atlassian had debt of US$348.8m at the end of June 2021, a reduction from US$889.2m over a year. But it also has US$1.23b in cash to offset that, meaning it has US$883.4m net cash.
A Look At Atlassian's Liabilities
According to the last reported balance sheet, Atlassian had liabilities of US$2.31b due within 12 months, and liabilities of US$340.4m due beyond 12 months. Offsetting these obligations, it had cash of US$1.23b as well as receivables valued at US$183.4m due within 12 months. So it has liabilities totalling US$1.23b more than its cash and near-term receivables, combined.
This state of affairs indicates that Atlassian's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$88.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Atlassian boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, Atlassian's EBIT launched higher than Elon Musk, gaining a whopping 682% on last year. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Atlassian 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. Happily for any shareholders, Atlassian actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
We could understand if investors are concerned about Atlassian's liabilities, but we can be reassured by the fact it has has net cash of US$883.4m. The cherry on top was that in converted 1,084% of that EBIT to free cash flow, bringing in US$808m. So is Atlassian's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Atlassian you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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