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Is Elastic (NYSE:ESTC) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Elastic N.V. (NYSE:ESTC) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Elastic

What Is Elastic's Net Debt?

As you can see below, at the end of July 2021, Elastic had US$565.8m of debt, up from none a year ago. Click the image for more detail. But it also has US$991.3m in cash to offset that, meaning it has US$425.5m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Elastic's Balance Sheet?

The latest balance sheet data shows that Elastic had liabilities of US$434.7m due within a year, and liabilities of US$629.5m falling due after that. On the other hand, it had cash of US$991.3m and US$110.8m worth of receivables due within a year. So it can boast US$37.9m more liquid assets than total liabilities.

Having regard to Elastic's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$14.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Elastic 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 Elastic 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 Elastic wasn't profitable at an EBIT level, but managed to grow its revenue by 44%, to US$673m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Elastic?

While Elastic lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$9.1m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 44% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Elastic (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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