Is Okta (NASDAQ:OKTA) Using Debt Sensibly?

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.' 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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Okta

How Much Debt Does Okta Carry?

The image below, which you can click on for greater detail, shows that Okta had debt of US$1.15b at the end of January 2024, a reduction from US$2.19b over a year. However, it does have US$2.20b in cash offsetting this, leading to net cash of US$1.05b.

How Strong Is Okta's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Okta had liabilities of US$1.78b due within 12 months and liabilities of US$1.32b due beyond that. Offsetting this, it had US$2.20b in cash and US$579.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$320.0m.

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$16.4b 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. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Okta wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$2.3b. Shareholders probably have their fingers crossed that it can grow its way to profits.

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$488m. 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. One positive is that Okta is growing revenue apace, which makes it easier to sell a growth story and 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Okta , and understanding them should be part of your investment process.

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.