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. Importantly, Confluent, Inc. (NASDAQ:CFLT) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Confluent's Debt?
The chart below, which you can click on for greater detail, shows that Confluent had US$1.09b in debt in December 2023; about the same as the year before. However, its balance sheet shows it holds US$1.90b in cash, so it actually has US$812.5m net cash.
How Strong Is Confluent's Balance Sheet?
According to the last reported balance sheet, Confluent had liabilities of US$487.0m due within 12 months, and liabilities of US$1.16b due beyond 12 months. On the other hand, it had cash of US$1.90b and US$230.0m worth of receivables due within a year. So it can boast US$480.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Confluent could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Confluent 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 ultimately the future profitability of the business will decide if Confluent 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.
Over 12 months, Confluent reported revenue of US$777m, which is a gain of 33%, 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 Confluent?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Confluent had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$124m of cash and made a loss of US$443m. But the saving grace is the US$812.5m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Confluent may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Confluent has 4 warning signs we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.