Is Shopify (NYSE:SHOP) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Shopify Inc. (NYSE:SHOP) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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.

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$917.0m in debt in September 2024; about the same as the year before. However, it does have US$4.90b in cash offsetting this, leading to net cash of US$3.98b.

How Healthy Is Shopify's Balance Sheet?

According to the last reported balance sheet, Shopify had liabilities of US$921.0m due within 12 months, and liabilities of US$1.29b due beyond 12 months. Offsetting these obligations, it had cash of US$4.90b as well as receivables valued at US$1.24b due within 12 months. So it can boast US$3.93b more liquid assets than total liabilities.

This short term liquidity is a sign that Shopify could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shopify has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Shopify turned things around in the last 12 months, delivering and EBIT of US$1.1b. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shopify 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shopify may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Shopify actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shopify has net cash of US$3.98b, as well as more liquid assets than liabilities. The cherry on top was that in converted 133% of that EBIT to free cash flow, bringing in US$1.4b. So we don't think Shopify's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Shopify you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.