Is Splunk (NASDAQ:SPLK) A Risky Investment?

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.' 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 Splunk Inc. (NASDAQ:SPLK) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 Splunk

How Much Debt Does Splunk Carry?

The image below, which you can click on for greater detail, shows that at October 2020 Splunk had debt of US$2.21b, up from US$1.69b in one year. On the flip side, it has US$1.99b in cash leading to net debt of about US$213.4m.

A Look At Splunk's Liabilities

Zooming in on the latest balance sheet data, we can see that Splunk had liabilities of US$1.26b due within 12 months and liabilities of US$2.73b due beyond that. Offsetting these obligations, it had cash of US$1.99b as well as receivables valued at US$800.0m due within 12 months. So its liabilities total US$1.19b more than the combination of its cash and short-term receivables.

Of course, Splunk has a titanic market capitalization of US$25.3b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Splunk has virtually no net debt, 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 ultimately the future profitability of the business will decide if Splunk 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 Splunk wasn't profitable at an EBIT level, but managed to grow its revenue by 3.8%, to US$2.3b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Splunk produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$555m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$315m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Splunk that 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. 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.
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