Is Datadog (NASDAQ:DDOG) Using Too Much 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Datadog, Inc. (NASDAQ:DDOG) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Datadog had debt of US$575.9m, up from none in one year. But it also has US$1.52b in cash to offset that, meaning it has US$941.6m net cash.

How Strong Is Datadog's Balance Sheet?

The latest balance sheet data shows that Datadog had liabilities of US$297.8m due within a year, and liabilities of US$635.0m falling due after that. Offsetting this, it had US$1.52b in cash and US$163.4m in receivables that were due within 12 months. So it actually has US$748.0m more liquid assets than total liabilities.

This surplus suggests that Datadog has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Datadog boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Datadog wasn't profitable at an EBIT level, but managed to grow its revenue by 66%, to US$603m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Datadog?

Although Datadog had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$83m. 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 66% 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 Datadog (1 is significant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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