Is Sprout Social (NASDAQ:SPT) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Sprout Social, Inc. (NASDAQ:SPT) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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, 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 Sprout Social

What Is Sprout Social's Net Debt?

As you can see below, at the end of September 2023, Sprout Social had US$75.0m of debt, up from none a year ago. Click the image for more detail. But it also has US$113.0m in cash to offset that, meaning it has US$38.0m net cash.

How Healthy Is Sprout Social's Balance Sheet?

According to the last reported balance sheet, Sprout Social had liabilities of US$163.3m due within 12 months, and liabilities of US$92.1m due beyond 12 months. On the other hand, it had cash of US$113.0m and US$45.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$97.2m.

Of course, Sprout Social has a market capitalization of US$2.60b, so these liabilities are probably manageable. 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, Sprout Social 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 Sprout Social'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 Sprout Social wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to US$310m. With any luck the company will be able to grow its way to profitability.

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$10m. 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. The good news for Sprout Social shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat 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 4 warning signs for Sprout Social (1 shouldn't be ignored!) that you should be aware of before investing here.

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.