Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Elastic SA (NYSE: ESTC) carries debt. But should shareholders be concerned about its use of debt?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

What is Elastic Net Debt?

You can click on the graph below for historical numbers, but it shows that as of July 2021, Elastic had $ 565.8 million in debt, an increase from none, year over year. But it also has $ 993.7 million in cash to make up for that, which means it has $ 427.9 million in net cash.

NYSE: ESTC Debt to Equity History October 18, 2021

A look at the responsibilities of Elastic

The latest balance sheet data shows that Elastic had a liability of $ 434.7 million due within one year, and a liability of $ 629.5 million due thereafter. In return, he had $ 993.7 million in cash and $ 110.8 million in receivables due within 12 months. So he actually has $ 40.3 million Following liquid assets as total liabilities.

Considering Elastic’s size, it appears that his liquid assets are well balanced with his total liabilities. So the $ 15.8 billion company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. Put simply, the fact that Elastic has more cash than debt is arguably a good indication that it can safely manage its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Elastic’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.

Last year, Elastic was unprofitable in EBIT, but managed to increase revenue by 44% to US $ 673 million. The shareholders are probably keeping their fingers crossed that this could generate a profit.

So how risky is elasticity?

While Elastic lost money in earnings before interest and taxes (EBIT), it actually generated positive free cash flow of US $ 9.1 million. So taking this at face value and considering the net cash position, we don’t think the security is too risky in the short term. Keeping in mind its 44% revenue growth over the past year, we think there’s a good chance the company is on the right track. We would see strong new growth as an optimistic indication. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Example: we have spotted 4 warning signs for Elastic you need to be aware of it, and one of them is important.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.

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