These 4 Measures Indicate That Roku (NASDAQ:ROKU) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Roku, Inc. (NASDAQ:ROKU) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Roku

What Is Roku's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Roku had US$88.6m of debt in March 2022, down from US$93.5m, one year before. But on the other hand it also has US$2.24b in cash, leading to a US$2.15b net cash position.

A Look At Roku's Liabilities

We can see from the most recent balance sheet that Roku had liabilities of US$855.5m falling due within a year, and liabilities of US$557.6m due beyond that. Offsetting this, it had US$2.24b in cash and US$737.4m in receivables that were due within 12 months. So it actually has US$1.56b 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. Simply put, the fact that Roku has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Roku grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Roku has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Roku actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Roku has net cash of US$2.15b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$183m, being 135% of its EBIT. So we don't think Roku's use of debt is risky. 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. For example, we've discovered 2 warning signs for Roku that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.