Is Confluent (NASDAQ:CFLT) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Confluent, Inc. (NASDAQ:CFLT) does use debt in its business. But is this debt a concern to shareholders?

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Confluent Carry?

As you can see below, Confluent had US$1.09b of debt, at December 2024, 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$1.91b in cash, leading to a US$818.4m net cash position.

How Strong Is Confluent's Balance Sheet?

We can see from the most recent balance sheet that Confluent had liabilities of US$589.2m falling due within a year, and liabilities of US$1.14b due beyond that. On the other hand, it had cash of US$1.91b and US$314.3m worth of receivables due within a year. So it actually has US$491.2m 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. Succinctly put, Confluent boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Check out our latest analysis for Confluent

In the last year Confluent wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to US$964m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Confluent?

While Confluent lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$9.5m. 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. We think its revenue growth of 24% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. For instance, we've identified 3 warning signs for Confluent that 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.