Guidewire Software (NYSE: GWRE) has debt but no profit; Should we be worried?

David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We can see that Guidewire Software, Inc. (NYSE: GWRE) uses debt in its business. But the real question is whether this debt makes the business risky.

Why Does Debt Bring Risk?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first look at cash and debt levels, together.

See our latest review for Guidewire Software

What is Guidewire Software’s debt?

You can click on the graph below for the historical numbers, but it shows that as of July 2021, Guidewire Software had $ 343.8 million in debt, an increase of $ 330.2 million over one year. However, it has US $ 1.13 billion in cash offsetting this, leading to a net cash position of US $ 785.4 million.

NYSE: GWRE Debt to Equity History December 3, 2021

A look at Guidewire Software’s responsibilities

Zooming in on the latest balance sheet data, we can see that Guidewire Software had a liability of US $ 300.3 million due within 12 months and a liability of US $ 476.6 million beyond. In compensation for these obligations, he had cash of US $ 1.13 billion as well as receivables valued at US $ 183.1 million maturing within 12 months. So he actually has $ 535.4 million Following liquid assets as total liabilities.

This short-term liquidity is a sign that Guidewire Software could probably repay its debt easily, as its balance sheet is far from tight. In short, Guidewire Software has clean cash flow, so it’s fair to say that it doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious place to start. But it is future profits, more than anything, that will determine Guidewire Software’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

Guidewire Software’s revenue was fairly stable over the past year and generated negative EBIT. While that doesn’t impress much, it’s not too bad either.

So how risky is Guidewire software?

Although Guidewire Software recorded a loss of earnings before interest and taxes (EBIT) for the past twelve months, it generated positive free cash flow of US $ 83 million. So taking this at face value and considering the net cash position, we don’t think the security is too risky in the short term. We will feel more comfortable with the stock once EBIT is positive, given the weak revenue growth. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for Guidewire software that you need to be aware of.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.