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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Datadog, Inc. (NASDAQ:DDOG) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Datadog
What Is Datadog's Debt?
As you can see below, at the end of December 2020, Datadog had US$575.9m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$1.52b in cash, so it actually has US$941.6m net cash.
How Strong Is Datadog's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Datadog had liabilities of US$297.8m due within 12 months and liabilities of US$635.0m due beyond that. Offsetting these obligations, it had cash of US$1.52b as well as receivables valued at US$171.2m due within 12 months. So it can boast US$755.8m more liquid assets than total liabilities.
This surplus suggests that Datadog has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Datadog has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Datadog 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.
In the last year Datadog wasn't profitable at an EBIT level, but managed to grow its revenue by 66%, to US$603m. Shareholders probably have their fingers crossed that it can grow its way to profits.