Health Check: How Prudently Does CrowdStrike Holdings (NASDAQ:CRWD) Use 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 CrowdStrike Holdings, Inc. (NASDAQ:CRWD) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CrowdStrike Holdings

How Much Debt Does CrowdStrike Holdings Carry?

The chart below, which you can click on for greater detail, shows that CrowdStrike Holdings had US$740.6m in debt in October 2022; about the same as the year before. But it also has US$2.47b in cash to offset that, meaning it has US$1.73b net cash.

How Strong Is CrowdStrike Holdings' Balance Sheet?

The latest balance sheet data shows that CrowdStrike Holdings had liabilities of US$1.82b due within a year, and liabilities of US$1.31b falling due after that. Offsetting this, it had US$2.47b in cash and US$485.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$179.9m.

Having regard to CrowdStrike Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$29.9b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, CrowdStrike Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CrowdStrike Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year CrowdStrike Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 58%, to US$2.0b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is CrowdStrike Holdings?

Although CrowdStrike Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$594m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for CrowdStrike Holdings shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with CrowdStrike Holdings , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.