Would MicroStrategy (NASDAQ:MSTR) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, MicroStrategy Incorporated (NASDAQ:MSTR) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for MicroStrategy

How Much Debt Does MicroStrategy Carry?

The image below, which you can click on for greater detail, shows that MicroStrategy had debt of US$2.18b at the end of June 2023, a reduction from US$2.37b over a year. However, because it has a cash reserve of US$66.0m, its net debt is less, at about US$2.11b.

A Look At MicroStrategy's Liabilities

Zooming in on the latest balance sheet data, we can see that MicroStrategy had liabilities of US$272.9m due within 12 months and liabilities of US$2.27b due beyond that. On the other hand, it had cash of US$66.0m and US$122.8m worth of receivables due within a year. So its liabilities total US$2.36b more than the combination of its cash and short-term receivables.

MicroStrategy has a market capitalization of US$4.95b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, MicroStrategy saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months MicroStrategy produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$235m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$580m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example MicroStrategy has 5 warning signs (and 3 which don't sit too well with us) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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