Is Spotify Technology (NYSE:SPOT) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Spotify Technology S.A. (NYSE:SPOT) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Spotify Technology

What Is Spotify Technology's Debt?

As you can see below, at the end of March 2024, Spotify Technology had €1.27b of debt, up from €1.16b a year ago. Click the image for more detail. However, it does have €4.33b in cash offsetting this, leading to net cash of €3.06b.

How Strong Is Spotify Technology's Balance Sheet?

The latest balance sheet data shows that Spotify Technology had liabilities of €3.97b due within a year, and liabilities of €1.80b falling due after that. Offsetting this, it had €4.33b in cash and €798.0m in receivables that were due within 12 months. So its liabilities total €634.0m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Spotify Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €55.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Spotify Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Spotify Technology made a loss at the EBIT level, last year, it was also good to see that it generated €242m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Spotify Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Spotify Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Spotify Technology actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Spotify Technology's liabilities, but we can be reassured by the fact it has has net cash of €3.06b. And it impressed us with free cash flow of €823m, being 340% of its EBIT. So is Spotify Technology's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Spotify Technology you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.