Does Okta (NASDAQ:OKTA) Have A Healthy Balance Sheet?

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. As with many other companies Okta, Inc. (NASDAQ:OKTA) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Okta

What Is Okta's Net Debt?

The image below, which you can click on for greater detail, shows that at October 2022 Okta had debt of US$2.20b, up from US$1.81b in one year. But it also has US$2.47b in cash to offset that, meaning it has US$276.4m net cash.

How Strong Is Okta's Balance Sheet?

According to the last reported balance sheet, Okta had liabilities of US$1.31b due within 12 months, and liabilities of US$2.38b due beyond 12 months. Offsetting these obligations, it had cash of US$2.47b as well as receivables valued at US$389.7m due within 12 months. So it has liabilities totalling US$823.3m more than its cash and near-term receivables, combined.

Since publicly traded Okta shares are worth a very impressive total of US$12.1b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Okta also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Okta can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Okta reported revenue of US$1.7b, which is a gain of 50%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Okta?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Okta had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$4.9m of cash and made a loss of US$903m. Given it only has net cash of US$276.4m, the company may need to raise more capital if it doesn't reach break-even soon. Okta's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For example - Okta 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.