Is MicroStrategy (NASDAQ:MSTR) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies MicroStrategy Incorporated (NASDAQ:MSTR) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for MicroStrategy

What Is MicroStrategy's Debt?

The image below, which you can click on for greater detail, shows that MicroStrategy had debt of US$2.18b at the end of September 2023, a reduction from US$2.38b over a year. On the flip side, it has US$45.0m in cash leading to net debt of about US$2.14b.

How Healthy Is MicroStrategy's Balance Sheet?

According to the last reported balance sheet, MicroStrategy had liabilities of US$267.7m due within 12 months, and liabilities of US$2.27b due beyond 12 months. On the other hand, it had cash of US$45.0m and US$130.0m worth of receivables due within a year. So it has liabilities totalling US$2.36b more than its cash and near-term receivables, combined.

MicroStrategy has a market capitalization of US$8.25b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 MicroStrategy'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.

Over 12 months, MicroStrategy saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, MicroStrategy had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$266m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$742m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for MicroStrategy you should be aware of, and 3 of them are a bit unpleasant.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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