Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Datadog, Inc. (NASDAQ:DDOG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

What Is Datadog’s Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Datadog had debt of US$733.0m, up from none in one year. However, its balance sheet shows it holds US$1.55b in cash, so it actually has US$814.9m net cash.

How Healthy Is Datadog’s Balance Sheet?

We can see from the most recent balance sheet that Datadog had liabilities of US$320.8m falling due within a year, and liabilities of US$789.9m due beyond that. Offsetting these obligations, it had cash of US$1.55b as well as receivables valued at US$154.1m due within 12 months. So it can boast US$591.3m more liquid assets than total liabilities.

Having regard to Datadog’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$30.3b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Datadog boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Datadog can strengthen its balance sheet over time.

Over 12 months, Datadog reported revenue of US$671m, which is a gain of 58%, 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 Datadog?

While Datadog lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$108m. 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. We think its revenue growth of 58% is a good sign. We’d see further strong growth as an optimistic indication. There’s no doubt that we learn most about debt from the balance sheet.