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. As with many other companies HubSpot, Inc. (NYSE:HUBS) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is HubSpot's Debt?

The chart below, which you can click on for greater detail, shows that HubSpot had US$456.2m in debt in December 2023; about the same as the year before. But it also has US$1.39b in cash to offset that, meaning it has US$932.0m net cash.

How Healthy Is HubSpot's Balance Sheet?

We can see from the most recent balance sheet that HubSpot had liabilities of US$956.2m falling due within a year, and liabilities of US$795.0m due beyond that. On the other hand, it had cash of US$1.39b and US$295.3m worth of receivables due within a year. So it has liabilities totalling US$67.7m more than its cash and near-term receivables, combined.

This state of affairs indicates that HubSpot's 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$32.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, HubSpot also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 HubSpot'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.

Over 12 months, HubSpot reported revenue of US$2.2b, which is a gain of 25%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is HubSpot?

While HubSpot lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$251m. 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 HubSpot is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for HubSpot 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.