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. Importantly, Okta, Inc. (NASDAQ:OKTA) does carry debt. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Okta's Debt?
As you can see below, at the end of April 2021, Okta had US$1.77b of debt, up from US$948.1m a year ago. Click the image for more detail. But on the other hand it also has US$2.69b in cash, leading to a US$918.0m net cash position.
How Healthy Is Okta's Balance Sheet?
We can see from the most recent balance sheet that Okta had liabilities of US$800.5m falling due within a year, and liabilities of US$1.95b due beyond that. Offsetting these obligations, it had cash of US$2.69b as well as receivables valued at US$228.0m due within 12 months. So it actually has US$170.4m more liquid assets than total liabilities.
This state of affairs indicates that Okta's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$36.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Okta boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Okta'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, Okta reported revenue of US$904m, which is a gain of 40%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Okta?
While Okta lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$134m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 40% is a good sign. We'd see further strong growth as an optimistic indication. 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, we've discovered 3 warning signs for Okta that you should be aware of before investing here.
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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