Is Elastic (NYSE:ESTC) Using Too Much 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.' 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 Elastic N.V. (NYSE:ESTC) does use debt in its business. But is this debt a concern to shareholders?

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 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. 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.

Check out our latest analysis for Elastic

What Is Elastic's Debt?

As you can see below, Elastic had US$569.2m of debt, at October 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$1.20b in cash, so it actually has US$628.4m net cash.

A Look At Elastic's Liabilities

We can see from the most recent balance sheet that Elastic had liabilities of US$790.7m falling due within a year, and liabilities of US$629.3m due beyond that. Offsetting this, it had US$1.20b in cash and US$256.1m in receivables that were due within 12 months. So it actually has US$33.7m more liquid assets than total liabilities.

Having regard to Elastic's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$10.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Elastic 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 Elastic's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Elastic wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to US$1.4b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Elastic?

Although Elastic had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$60m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Elastic (1 is concerning) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.