Is Confluent (NASDAQ:CFLT) A Risky Investment?

Warren Buffett famously said, '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. Importantly, Confluent, Inc. (NASDAQ:CFLT) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Confluent

What Is Confluent's Net Debt?

The chart below, which you can click on for greater detail, shows that Confluent had US$1.09b in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds US$1.86b in cash, so it actually has US$768.3m net cash.

How Strong Is Confluent's Balance Sheet?

We can see from the most recent balance sheet that Confluent had liabilities of US$535.0m falling due within a year, and liabilities of US$1.14b due beyond that. On the other hand, it had cash of US$1.86b and US$278.7m worth of receivables due within a year. So it can boast US$464.5m more liquid assets than total liabilities.

This surplus suggests that Confluent has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Confluent has more cash than debt is arguably a good indication that 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 Confluent'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, Confluent reported revenue of US$916m, which is a gain of 25%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Confluent?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Confluent lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$13m and booked a US$351m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$768.3m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Confluent may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Confluent you should know about.

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.