NASDAQ:SPLK) makes use of debt. But should shareholders be worried about its use of debt?” data-reactid=”28″>Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ 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. As with many other companies Splunk Inc. (NASDAQ:SPLK) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Splunk ” data-reactid=”31″> View our latest analysis for Splunk
What Is Splunk’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of April 2020 Splunk had US$1.74b of debt, an increase on US$1.65b, over one year. However, it does have US$1.76b in cash offsetting this, leading to net cash of US$21.5m.
How Healthy Is Splunk’s Balance Sheet?
The latest balance sheet data shows that Splunk had liabilities of US$1.16b due within a year, and liabilities of US$2.25b falling due after that. Offsetting these obligations, it had cash of US$1.76b as well as receivables valued at US$645.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.0b.
this free report on analyst profit forecasts to be interesting.” data-reactid=”52″>Given Splunk has a humongous market capitalization of US$32.3b, it’s hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Splunk 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 Splunk can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Splunk reported revenue of US$2.4b, which is a gain of 23%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Splunk?
Splunk is showing 3 warning signs in our investment analysis , you should know about…” data-reactid=”55″>We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Splunk had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$383.7m of cash and made a loss of US$486.8m. But the saving grace is the US$21.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Splunk may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Splunk is showing 3 warning signs in our investment analysis , you should know about…
our exclusive list of net cash growth stocks, today.” data-reactid=”60″>Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
Get in touch with us directly. Alternatively, email email@example.com.” data-reactid=”61″>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. 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.
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