Datadog (NASDAQ:DDOG) Could Easily Take On More Debt

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.' 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. As with many other companies Datadog, Inc. (NASDAQ:DDOG) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Datadog

What Is Datadog's Debt?

As you can see below, Datadog had US$737.2m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.70b in cash to offset that, meaning it has US$966.4m net cash.

How Healthy Is Datadog's Balance Sheet?

We can see from the most recent balance sheet that Datadog had liabilities of US$625.9m falling due within a year, and liabilities of US$813.5m due beyond that. Offsetting these obligations, it had cash of US$1.70b as well as receivables valued at US$305.5m due within 12 months. So it can boast US$569.7m more liquid assets than total liabilities.

Having regard to Datadog's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$31.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Datadog boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Datadog made a loss at the EBIT level, last year, it was also good to see that it generated US$11m in EBIT over the last twelve months. 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 Datadog'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Datadog may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Datadog actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Datadog has net cash of US$966.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$354m, being 3,266% of its EBIT. So is Datadog's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Datadog , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.