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Is Okta, Inc.'s (NASDAQ:OKTA) Balance Sheet A Threat To Its Future?

Simply Wall St

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There are a number of reasons that attract investors towards large-cap companies such as Okta, Inc. (NASDAQ:OKTA), with a market cap of US$14b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to their continued success lies in its financial health. This article will examine Okta’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into OKTA here.

See our latest analysis for Okta

Does OKTA Produce Much Cash Relative To Its Debt?

OKTA has built up its total debt levels in the last twelve months, from US$260m to US$422m , which is mainly comprised of near term debt. With this increase in debt, OKTA currently has US$547m remaining in cash and short-term investments to keep the business going. On top of this, OKTA has generated US$32m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 7.7%, meaning that OKTA’s operating cash is less than its debt.

Can OKTA pay its short-term liabilities?

Looking at OKTA’s US$602m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$677m, leading to a 1.12x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For IT companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NasdaqGS:OKTA Historical Debt, June 7th 2019

Is OKTA’s debt level acceptable?

Since equity is smaller than total debt levels, Okta is considered to have high leverage. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. But since OKTA is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

At its current level of cash flow coverage, OKTA has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. Keep in mind I haven't considered other factors such as how OKTA has been performing in the past. I suggest you continue to research Okta to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for OKTA’s future growth? Take a look at our free research report of analyst consensus for OKTA’s outlook.
  2. Valuation: What is OKTA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether OKTA is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.