Is Roblox (NYSE:RBLX) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Roblox Corporation (NYSE:RBLX) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Roblox

What Is Roblox's Debt?

The chart below, which you can click on for greater detail, shows that Roblox had US$1.01b in debt in September 2024; about the same as the year before. But it also has US$2.32b in cash to offset that, meaning it has US$1.32b net cash.

How Strong Is Roblox's Balance Sheet?

According to the last reported balance sheet, Roblox had liabilities of US$3.44b due within 12 months, and liabilities of US$3.07b due beyond 12 months. Offsetting these obligations, it had cash of US$2.32b as well as receivables valued at US$401.9m due within 12 months. So its liabilities total US$3.78b more than the combination of its cash and short-term receivables.

Given Roblox has a humongous market capitalization of US$46.6b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Roblox 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 Roblox'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, Roblox reported revenue of US$3.4b, which is a gain of 28%, 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 Roblox?

Although Roblox had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$599m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that Roblox is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock 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 - Roblox has 2 warning signs we think you should be aware of.

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.