Asana (NYSE:ASAN) Has Debt But No Earnings; Should You Worry?

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 Asana, Inc. (NYSE:ASAN) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Asana

How Much Debt Does Asana Carry?

The image below, which you can click on for greater detail, shows that Asana had debt of US$41.1m at the end of July 2024, a reduction from US$45.5m over a year. However, it does have US$521.6m in cash offsetting this, leading to net cash of US$480.5m.

How Strong Is Asana's Balance Sheet?

We can see from the most recent balance sheet that Asana had liabilities of US$393.1m falling due within a year, and liabilities of US$260.3m due beyond that. On the other hand, it had cash of US$521.6m and US$65.1m worth of receivables due within a year. So it has liabilities totalling US$66.8m more than its cash and near-term receivables, combined.

Since publicly traded Asana shares are worth a total of US$3.27b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Asana 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 ultimately the future profitability of the business will decide if Asana 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 Asana wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$689m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Asana?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Asana lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$20m and booked a US$260m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$480.5m. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Asana is showing 3 warning signs in our investment analysis , you should know about...

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.