Splunk (NASDAQ:SPLK) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. 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.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Splunk

What Is Splunk's Net Debt?

The image below, which you can click on for greater detail, shows that at January 2021 Splunk had debt of US$2.24b, up from US$1.71b in one year. On the flip side, it has US$1.86b in cash leading to net debt of about US$379.0m.

How Strong Is Splunk's Balance Sheet?

According to the last reported balance sheet, Splunk had liabilities of US$1.52b due within 12 months, and liabilities of US$2.75b due beyond 12 months. Offsetting these obligations, it had cash of US$1.86b as well as receivables valued at US$1.11b due within 12 months. So its liabilities total US$1.30b more than the combination of its cash and short-term receivables.

Given Splunk has a humongous market capitalization of US$22.5b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Splunk'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.

In the last year Splunk had a loss before interest and tax, and actually shrunk its revenue by 5.5%, to US$2.2b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Splunk produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$769m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$243m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Splunk you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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