Is Sprout Social (NASDAQ:SPT) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Sprout Social, Inc. (NASDAQ:SPT) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Sprout Social

How Much Debt Does Sprout Social Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Sprout Social had debt of US$55.0m, up from none in one year. But on the other hand it also has US$94.4m in cash, leading to a US$39.4m net cash position.

How Strong Is Sprout Social's Balance Sheet?

The latest balance sheet data shows that Sprout Social had liabilities of US$181.0m due within a year, and liabilities of US$71.4m falling due after that. Offsetting these obligations, it had cash of US$94.4m as well as receivables valued at US$63.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$94.5m.

Of course, Sprout Social has a market capitalization of US$3.41b, 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! 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Sprout Social wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to US$334m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sprout Social?

Although Sprout Social had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$4.4m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. 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 we still think it's somewhat risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Sprout Social (including 1 which is a bit unpleasant) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.