David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Confluent, Inc. (NASDAQ:CFLT) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Confluent Carry?

As you can see below, Confluent had US$1.09b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$1.93b in cash, so it actually has US$841.0m net cash.

How Healthy Is Confluent's Balance Sheet?

We can see from the most recent balance sheet that Confluent had liabilities of US$520.2m falling due within a year, and liabilities of US$1.13b due beyond that. Offsetting these obligations, it had cash of US$1.93b as well as receivables valued at US$257.5m due within 12 months. So it actually has US$534.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Confluent could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Confluent has more cash than debt is arguably a good indication that 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 Confluent 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.

In the last year Confluent wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to US$866m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Confluent?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Confluent had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$35m of cash and made a loss of US$370m. But the saving grace is the US$841.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Confluent may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Confluent .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.