Is Elastic (NYSE:ESTC) 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.' 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 Elastic N.V. (NYSE:ESTC) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Elastic

What Is Elastic's Net Debt?

The chart below, which you can click on for greater detail, shows that Elastic had US$567.5m in debt in April 2023; about the same as the year before. But on the other hand it also has US$915.2m in cash, leading to a US$347.7m net cash position.

A Look At Elastic's Liabilities

We can see from the most recent balance sheet that Elastic had liabilities of US$716.6m falling due within a year, and liabilities of US$628.0m due beyond that. Offsetting these obligations, it had cash of US$915.2m as well as receivables valued at US$260.9m due within 12 months. So it has liabilities totalling US$168.5m more than its cash and near-term receivables, combined.

Of course, Elastic has a market capitalization of US$6.22b, 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. While it does have liabilities worth noting, Elastic also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Elastic'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 Elastic wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to US$1.1b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Elastic?

Although Elastic had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$33m. 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 Elastic 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. 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. For example, we've discovered 3 warning signs for Elastic 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.