Is Shopify (NYSE:SHOP) Using Debt In A Risky Way?

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.' 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. Importantly, Shopify Inc. (NYSE:SHOP) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Shopify

What Is Shopify's Net Debt?

As you can see below, Shopify had US$915.0m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$4.92b in cash offsetting this, leading to net cash of US$4.00b.

A Look At Shopify's Liabilities

We can see from the most recent balance sheet that Shopify had liabilities of US$852.0m falling due within a year, and liabilities of US$1.33b due beyond that. On the other hand, it had cash of US$4.92b and US$927.0m worth of receivables due within a year. So it actually has US$3.67b 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. There's no doubt that we learn most about debt from the balance sheet. 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 27%, to US$6.7b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Shopify?

Although Shopify had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$549m. 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. Keeping in mind its 27% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. 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 1 warning sign for Shopify that you should be aware of before investing here.

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.