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.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that CrowdStrike Holdings, Inc. (NASDAQ:CRWD) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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 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, plenty of companies use debt to fund growth, without any negative consequences. 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?
You can click the graphic below for the historical numbers, but it shows that as of April 2021 CrowdStrike Holdings had US$738.4m of debt, an increase on none, over one year. But on the other hand it also has US$1.68b in cash, leading to a US$946.6m net cash position.
How Healthy Is CrowdStrike Holdings’ Balance Sheet?
According to the last reported balance sheet, CrowdStrike Holdings had liabilities of US$982.8m due within 12 months, and liabilities of US$1.05b due beyond 12 months. Offsetting these obligations, it had cash of US$1.68b as well as receivables valued at US$211.2m due within 12 months. So it has liabilities totalling US$131.5m 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 while it’s hard to imagine that the US$53.7b company is struggling for cash, we still think it’s worth monitoring its 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. 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.
Over 12 months, CrowdStrike Holdings reported revenue of US$999m, which is a gain of 77%, 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 CrowdStrike Holdings?
While CrowdStrike Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$323m. 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.