Health Check: How Prudently Does Elastic (NYSE:ESTC) Use Debt?

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.' 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. Importantly, Elastic N.V. (NYSE:ESTC) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Elastic

How Much Debt Does Elastic Carry?

As you can see below, Elastic had US$568.3m of debt, at January 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$1.02b in cash, so it actually has US$446.7m net cash.

How Strong Is Elastic's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Elastic had liabilities of US$728.3m due within 12 months and liabilities of US$622.8m due beyond that. Offsetting this, it had US$1.02b in cash and US$229.9m in receivables that were due within 12 months. So its liabilities total US$106.1m more than the combination of its cash and short-term receivables.

Having regard to Elastic's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$10.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Elastic 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 Elastic can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Elastic wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$1.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Elastic?

Although Elastic had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$56m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Elastic has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.