Does Shopify (NYSE:SHOP) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Shopify Inc. (NYSE:SHOP) does carry debt. But should shareholders be worried about its use of debt?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shopify

How Much Debt Does Shopify Carry?

The chart below, which you can click on for greater detail, shows that Shopify had US$913.3m in debt in December 2022; about the same as the year before. But on the other hand it also has US$5.09b in cash, leading to a US$4.17b net cash position.

How Healthy Is Shopify's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shopify had liabilities of US$856.0m due within 12 months and liabilities of US$1.66b due beyond that. Offsetting this, it had US$5.09b in cash and US$486.9m in receivables that were due within 12 months. So it can boast US$3.06b more liquid assets than total liabilities.

This surplus suggests that Shopify has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shopify has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shopify'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 Shopify wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to US$5.6b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Shopify?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Shopify had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$186m and booked a US$3.5b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$4.17b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Shopify may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shopify is showing 2 warning signs in our investment analysis , you should know about...

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.