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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that CrowdStrike Holdings, Inc. (NASDAQ:CRWD) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 CrowdStrike Holdings's Net Debt?
As you can see below, CrowdStrike Holdings had US$742.5m of debt, at January 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$3.47b in cash, leading to a US$2.73b net cash position.
A Look At CrowdStrike Holdings' Liabilities
Zooming in on the latest balance sheet data, we can see that CrowdStrike Holdings had liabilities of US$2.70b due within 12 months and liabilities of US$1.61b due beyond that. Offsetting these obligations, it had cash of US$3.47b as well as receivables valued at US$853.1m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
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$76.9b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, CrowdStrike Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CrowdStrike Holdings can strengthen its balance sheet over time. 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, CrowdStrike Holdings reported revenue of US$3.1b, which is a gain of 36%, 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 CrowdStrike Holdings?
While CrowdStrike Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$89m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 36% is a good sign. We'd see further strong growth as an optimistic indication. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for CrowdStrike Holdings that you should be aware of.
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.