Health Check: How Prudently Does Okta (NASDAQ:OKTA) Use 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.' 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. We note that Okta, Inc. (NASDAQ:OKTA) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Okta

What Is Okta's Net Debt?

As you can see below, Okta had US$1.83b of debt, at January 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$2.50b in cash, leading to a US$669.9m net cash position.

A Look At Okta's Liabilities

Zooming in on the latest balance sheet data, we can see that Okta had liabilities of US$1.24b due within 12 months and liabilities of US$2.04b due beyond that. On the other hand, it had cash of US$2.50b and US$403.5m worth of receivables due within a year. So its liabilities total US$378.5m more than the combination of its cash and short-term receivables.

Having regard to Okta'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$22.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Okta wasn't profitable at an EBIT level, but managed to grow its revenue by 56%, to US$1.3b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Okta?

Although Okta had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$87m. 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. The good news for Okta shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Okta (of which 1 is potentially serious!) you should know about.

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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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.