Okta (NASDAQ:OKTA) Has Debt But No Earnings; Should You Worry?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Okta, Inc. (NASDAQ:OKTA) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is Okta's Debt?

The image below, which you can click on for greater detail, shows that Okta had debt of US$1.30b at the end of October 2023, a reduction from US$2.20b over a year. But on the other hand it also has US$2.13b in cash, leading to a US$828.0m net cash position.

How Strong Is Okta's Balance Sheet?

We can see from the most recent balance sheet that Okta had liabilities of US$1.54b falling due within a year, and liabilities of US$1.47b due beyond that. Offsetting these obligations, it had cash of US$2.13b as well as receivables valued at US$435.0m due within 12 months. So it has liabilities totalling US$445.0m more than its cash and near-term receivables, combined.

Since publicly traded Okta shares are worth a very impressive total of US$13.8b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Okta boasts net cash, so it's fair to say it does not have a heavy debt load! 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 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$2.2b, which is a gain of 25%, 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$394m. 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. 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. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.