The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies MongoDB, Inc. (NASDAQ:MDB) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does MongoDB Carry?

As you can see below, MongoDB had US$1.14b of debt, at July 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$2.26b in cash, leading to a US$1.12b net cash position.

How Healthy Is MongoDB's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MongoDB had liabilities of US$541.2m due within 12 months and liabilities of US$1.23b due beyond that. Offsetting this, it had US$2.26b in cash and US$311.2m in receivables that were due within 12 months. So it actually has US$807.8m more liquid assets than total liabilities.

This short term liquidity is a sign that MongoDB could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, MongoDB 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 ultimately the future profitability of the business will decide if MongoDB 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 MongoDB wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$1.8b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is MongoDB?

While MongoDB lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$149m. 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. We think its revenue growth of 22% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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 2 warning signs we've spotted with MongoDB .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.