Spotify Technology (NYSE:SPOT) Has A Pretty Healthy Balance Sheet

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.' 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. Importantly, Spotify Technology S.A. (NYSE:SPOT) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Spotify Technology

What Is Spotify Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Spotify Technology had €1.20b of debt, an increase on none, over one year. However, its balance sheet shows it holds €3.43b in cash, so it actually has €2.23b net cash.

A Look At Spotify Technology's Liabilities

According to the last reported balance sheet, Spotify Technology had liabilities of €3.23b due within 12 months, and liabilities of €1.83b due beyond 12 months. Offsetting this, it had €3.43b in cash and €626.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €992.0m.

Given Spotify Technology has a humongous market capitalization of €25.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Spotify Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Spotify Technology made a loss at the EBIT level, last year, but improved that to positive EBIT of €96m in 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Spotify Technology 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. Happily for any shareholders, Spotify Technology actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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 €2.23b. And it impressed us with free cash flow of €276m, being 288% of its EBIT. So we don't have any problem with Spotify Technology's use of debt. 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. For example, we've discovered 1 warning sign for Spotify Technology that you should be aware of before investing here.

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.