Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Workday, Inc. (NASDAQ:WDAY) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Workday

How Much Debt Does Workday Carry?

The chart below, which you can click on for greater detail, shows that Workday had US$2.98b in debt in January 2025; about the same as the year before. But on the other hand it also has US$8.02b in cash, leading to a US$5.03b net cash position.

How Healthy Is Workday's Balance Sheet?

We can see from the most recent balance sheet that Workday had liabilities of US$5.55b falling due within a year, and liabilities of US$3.40b due beyond that. Offsetting this, it had US$8.02b in cash and US$2.00b in receivables that were due within 12 months. So it actually has US$1.08b more liquid assets than total liabilities.

Having regard to Workday's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$65.0b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Workday has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Workday grew its EBIT by 173% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Workday's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Workday 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, Workday actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Workday has net cash of US$5.03b, as well as more liquid assets than liabilities. The cherry on top was that in converted 601% of that EBIT to free cash flow, bringing in US$2.2b. So is Workday's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Workday you should know about.

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.

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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.