Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that CrowdStrike Holdings, Inc. (NASDAQ:CRWD) 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does CrowdStrike Holdings Carry?
As you can see below, CrowdStrike Holdings had US$740.3m of debt, at July 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$2.32b in cash offsetting this, leading to net cash of US$1.58b.
How Healthy Is CrowdStrike Holdings' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that CrowdStrike Holdings had liabilities of US$1.65b due within 12 months and liabilities of US$1.26b due beyond that. On the other hand, it had cash of US$2.32b and US$418.8m worth of receivables due within a year. So its liabilities total US$173.2m more than the combination of its cash and short-term receivables.
This state of affairs indicates that CrowdStrike Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$36.4b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, CrowdStrike Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 CrowdStrike Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year CrowdStrike Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 61%, to US$1.8b. With any luck the company will be able to grow its way to profitability.
So How Risky Is CrowdStrike Holdings?
While CrowdStrike Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$543m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that CrowdStrike Holdings is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for CrowdStrike Holdings you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
