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 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. As with many other companies Ceridian HCM Holding Inc. (NYSE:CDAY) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ceridian HCM Holding

What Is Ceridian HCM Holding's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Ceridian HCM Holding had debt of US$1.21b, up from US$1.12b in one year. However, it also had US$371.2m in cash, and so its net debt is US$842.8m.

How Healthy Is Ceridian HCM Holding's Balance Sheet?

The latest balance sheet data shows that Ceridian HCM Holding had liabilities of US$5.70b due within a year, and liabilities of US$1.29b falling due after that. Offsetting these obligations, it had cash of US$371.2m as well as receivables valued at US$151.3m due within 12 months. So it has liabilities totalling US$6.47b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$8.83b, so it does suggest shareholders should keep an eye on Ceridian HCM Holding's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ceridian HCM Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Ceridian HCM Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to US$1.1b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Ceridian HCM Holding managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$17m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$10m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 Ceridian HCM Holding 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.