Is Snap (NYSE:SNAP) A Risky Investment?

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.' 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. We can see that Snap Inc. (NYSE:SNAP) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Snap

What Is Snap's Net Debt?

As you can see below, Snap had US$3.74b of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$4.10b in cash, leading to a US$359.2m net cash position.

How Healthy Is Snap's Balance Sheet?

The latest balance sheet data shows that Snap had liabilities of US$1.09b due within a year, and liabilities of US$4.22b falling due after that. Offsetting these obligations, it had cash of US$4.10b as well as receivables valued at US$892.5m due within 12 months. So its liabilities total US$314.0m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Snap's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$16.7b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Snap also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Snap'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.

In the last year Snap wasn't profitable at an EBIT level, but managed to grow its revenue by 2.7%, to US$4.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Snap?

While Snap lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$52m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Snap is showing 2 warning signs in our investment analysis , 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.