Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Sprout Social, Inc. (NASDAQ:SPT) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

What Is Sprout Social's Net Debt?

As you can see below, at the end of June 2024, Sprout Social had US$40.0m of debt, up from none a year ago. Click the image for more detail. But it also has US$93.2m in cash to offset that, meaning it has US$53.2m net cash.

A Look At Sprout Social's Liabilities

According to the last reported balance sheet, Sprout Social had liabilities of US$187.1m due within 12 months, and liabilities of US$54.4m due beyond 12 months. On the other hand, it had cash of US$93.2m and US$58.6m worth of receivables due within a year. So its liabilities total US$89.7m more than the combination of its cash and short-term receivables.

Given Sprout Social has a market capitalization of US$1.88b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Sprout Social also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Sprout Social 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.

Over 12 months, Sprout Social reported revenue of US$375m, which is a gain of 30%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Sprout Social?

Although Sprout Social had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$2.1m. 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. One positive is that Sprout Social is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Sprout Social that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.