Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We notice that Datadog, Inc. (NASDAQ: DDOG) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
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What is Datadog’s debt?
The image below, which you can click for more details, shows that in March 2021 Datadog was in debt of $ 733.0 million, up from none in a year. However, his balance sheet shows that he holds $ 1.55 billion in cash, so he actually has net cash of $ 814.9 million.
How healthy is Datadog’s track record?
We can see from the most recent balance sheet that Datadog had liabilities of US $ 320.8 million due within one year and liabilities of US $ 789.9 million due beyond. In compensation for these obligations, he had cash of US $ 1.55 billion as well as receivables valued at US $ 154.1 million due within 12 months. He can therefore avail himself of $ 591.3 million in liquid assets more than total Liabilities.
Considering Datadog’s size, it appears that its liquid assets are well balanced with its total liabilities. So the $ 30.3 billion company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. In short, Datadog has clean cash flow, so it’s fair to say it doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Datadog can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over 12 months, Datadog reported revenue of US $ 671 million, a gain of 58%, although it reported no earnings before interest and taxes. The shareholders are probably keeping their fingers crossed that this could generate a profit.
So how risky is Datadog?
While Datadog lost money on earnings before interest and taxes (EBIT), it actually generated positive free cash flow of US $ 108 million. So, although it is in deficit, it does not appear to have too much short-term balance sheet risk, given the net cash position. We think its 58% revenue growth is a good sign. We would see strong new growth as an optimistic indication. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 4 warning signs for Datadog you must be aware.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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