Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. Importantly, Okta, Inc. (NASDAQ:OKTA) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

How Much Debt Does Okta Carry?

As you can see below, at the end of January 2021, Okta had US$1.77b of debt, up from US$937.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$2.59b in cash, so it actually has US$821.1m net cash.

A Look At Okta’s Liabilities

We can see from the most recent balance sheet that Okta had liabilities of US$1.55b falling due within a year, and liabilities of US$1.06b due beyond that. On the other hand, it had cash of US$2.59b and US$205.3m worth of receivables due within a year. So it can boast US$187.8m more liquid assets than total liabilities.

This state of affairs indicates that Okta’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it’s hard to imagine that the US$34.4b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Succinctly put, Okta 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 Okta can strengthen its balance sheet over time.

Over 12 months, Okta reported revenue of US$835m, which is a gain of 42%, 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 Okta?

Although Okta had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$111m. 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 42% 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet.