Is CrowdStrike Holdings (NASDAQ:CRWD) Using Debt In A Risky Way?

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 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 note that CrowdStrike Holdings, Inc. (NASDAQ:CRWD) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CrowdStrike Holdings

What Is CrowdStrike Holdings's Debt?

As you can see below, CrowdStrike Holdings had US$739.9m of debt, at April 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$2.15b in cash to offset that, meaning it has US$1.41b net cash.

How Healthy Is CrowdStrike Holdings' Balance Sheet?

We can see from the most recent balance sheet that CrowdStrike Holdings had liabilities of US$1.50b falling due within a year, and liabilities of US$1.22b due beyond that. Offsetting this, it had US$2.15b in cash and US$369.1m in receivables that were due within 12 months. So it has liabilities totalling US$197.0m more than its cash and near-term receivables, combined.

Having regard to CrowdStrike Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$43.3b company is struggling for cash, we still think it's worth monitoring its 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CrowdStrike Holdings'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.

In the last year CrowdStrike Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 64%, to US$1.6b. With any luck the company will be able to grow its way to profitability.

So How Risky Is CrowdStrike Holdings?

While CrowdStrike Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$481m. 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. One positive is that CrowdStrike Holdings is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. 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 example - CrowdStrike Holdings has 2 warning signs we think you should be aware of.

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.