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 Conduent Incorporated (NASDAQ:CNDT) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Conduent's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Conduent had US$715.0m of debt in September 2024, down from US$1.28b, one year before. However, because it has a cash reserve of US$393.0m, its net debt is less, at about US$322.0m.

How Healthy Is Conduent's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Conduent had liabilities of US$827.0m due within 12 months and liabilities of US$991.0m due beyond that. On the other hand, it had cash of US$393.0m and US$823.0m worth of receivables due within a year. So it has liabilities totalling US$602.0m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$701.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Conduent can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Conduent made a loss at the EBIT level, and saw its revenue drop to US$3.5b, which is a fall of 6.6%. We would much prefer see growth.

Caveat Emptor

Importantly, Conduent had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$1.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$60m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. 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 2 warning signs for Conduent you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.