David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Elastic N.V. (NYSE:ESTC) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Elastic's Net Debt?
As you can see below, Elastic had US$566.8m of debt, at July 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$848.8m in cash, so it actually has US$282.0m net cash.
A Look At Elastic's Liabilities
We can see from the most recent balance sheet that Elastic had liabilities of US$560.3m falling due within a year, and liabilities of US$617.2m due beyond that. Offsetting this, it had US$848.8m in cash and US$168.0m in receivables that were due within 12 months. So its liabilities total US$160.7m more than the combination of its cash and short-term receivables.
Of course, Elastic has a market capitalization of US$6.39b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Elastic boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Elastic'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.
Over 12 months, Elastic reported revenue of US$919m, which is a gain of 37%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Elastic?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Elastic had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$24m and booked a US$239m accounting loss. But the saving grace is the US$282.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Elastic may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Elastic 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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