Yahoo Finance Health Check: How Prudently Does Datadog (NASDAQ:DDOG) Use Debt?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Datadog, Inc. (NASDAQ:DDOG) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Datadog
How Much Debt Does Datadog Carry?
The image below, which you can click on for greater detail, shows that at June 2020 Datadog had debt of US$559.6m, up from none in one year. However, it does have US$1.47b in cash offsetting this, leading to net cash of US$906.2m.
A Look At Datadog's Liabilities
Zooming in on the latest balance sheet data, we can see that Datadog had liabilities of US$241.4m due within 12 months and liabilities of US$629.4m due beyond that. On the other hand, it had cash of US$1.47b and US$124.1m worth of receivables due within a year. So it can boast US$719.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Datadog could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Datadog boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Datadog's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Datadog wasn't profitable at an EBIT level, but managed to grow its revenue by 80%, to US$481m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Datadog?
Although Datadog had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$3.5m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We think its revenue growth of 80% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. Take risks, for example - Datadog has 3 warning signs (and 2 which are potentially serious) we think you should know about.
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.
This article by Simply Wall St is general in nature. 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.
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