Shopify (NYSE:SHOP) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Shopify Inc. (NYSE:SHOP) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shopify

What Is Shopify's Net Debt?

As you can see below, Shopify had US$916.0m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$5.04b in cash, leading to a US$4.12b net cash position.

A Look At Shopify's Liabilities

We can see from the most recent balance sheet that Shopify had liabilities of US$898.0m falling due within a year, and liabilities of US$1.34b due beyond that. Offsetting this, it had US$5.04b in cash and US$964.0m in receivables that were due within 12 months. So it can boast US$3.77b 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. Succinctly put, Shopify boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Shopify made a loss at the EBIT level, last year, it was also good to see that it generated US$260m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shopify can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Happily for any shareholders, Shopify actually produced more free cash flow than EBIT over the last year. 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$4.12b, as well as more liquid assets than liabilities. The cherry on top was that in converted 348% of that EBIT to free cash flow, bringing in US$905m. So is Shopify's debt a risk? It doesn't seem so to us. 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 instance, we've identified 1 warning sign for Shopify that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.