Is Roku (NASDAQ:ROKU) Weighed On By Its Debt Load?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Roku, Inc. (NASDAQ:ROKU) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Roku

What Is Roku's Net Debt?

The image below, which you can click on for greater detail, shows that Roku had debt of US$80.0m at the end of December 2022, a reduction from US$89.9m over a year. However, it does have US$1.96b in cash offsetting this, leading to net cash of US$1.88b.

How Healthy Is Roku's Balance Sheet?

The latest balance sheet data shows that Roku had liabilities of US$1.08b due within a year, and liabilities of US$682.8m falling due after that. Offsetting these obligations, it had cash of US$1.96b as well as receivables valued at US$803.4m due within 12 months. So it actually has US$999.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Roku could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Roku boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Roku's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Roku reported revenue of US$3.1b, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Roku?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Roku had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$150m and booked a US$498m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$1.88b. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Roku , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.