Health Check: How Prudently Does Sprout Social (NASDAQ:SPT) Use Debt?

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 Sprout Social, Inc. (NASDAQ:SPT) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sprout Social

How Much Debt Does Sprout Social Carry?

As you can see below, Sprout Social had US$30.0m of debt at September 2024, down from US$75.0m a year prior. But on the other hand it also has US$91.5m in cash, leading to a US$61.5m net cash position.

How Healthy Is Sprout Social's Balance Sheet?

According to the last reported balance sheet, Sprout Social had liabilities of US$186.5m due within 12 months, and liabilities of US$44.2m due beyond 12 months. Offsetting these obligations, it had cash of US$91.5m as well as receivables valued at US$54.4m due within 12 months. So its liabilities total US$84.9m more than the combination of its cash and short-term receivables.

Given Sprout Social has a market capitalization of US$1.53b, 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. While it does have liabilities worth noting, Sprout Social also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sprout Social 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.

Over 12 months, Sprout Social reported revenue of US$392m, which is a gain of 27%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sprout Social?

While Sprout Social lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$17m. 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 Sprout Social 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, we've discovered 2 warning signs for Sprout Social that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.