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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, CrowdStrike Holdings, Inc. (NASDAQ:CRWD) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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. 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 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, at the end of July 2021, CrowdStrike Holdings had US$738.8m of debt, up from none a year ago. Click the image for more detail. But it also has US$1.79b in cash to offset that, meaning it has US$1.05b net cash.
How Healthy Is CrowdStrike Holdings' Balance Sheet?
The latest balance sheet data shows that CrowdStrike Holdings had liabilities of US$1.14b due within a year, and liabilities of US$1.09b falling due after that. Offsetting these obligations, it had cash of US$1.79b as well as receivables valued at US$266.5m due within 12 months. So it has liabilities totalling US$171.1m more than its cash and near-term receivables, combined.
Having regard to CrowdStrike Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$64.7b 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CrowdStrike Holdings 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.
In the last year CrowdStrike Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 74%, to US$1.1b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is CrowdStrike Holdings?
Although CrowdStrike Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$364m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with CrowdStrike Holdings .
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.
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.
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