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 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. Importantly, Datadog, Inc. (NASDAQ:DDOG) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Datadog's Debt?

The chart below, which you can click on for greater detail, shows that Datadog had US$744.0m in debt in June 2024; about the same as the year before. However, it does have US$2.96b in cash offsetting this, leading to net cash of US$2.22b.

How Strong Is Datadog's Balance Sheet?

The latest balance sheet data shows that Datadog had liabilities of US$1.79b due within a year, and liabilities of US$214.2m falling due after that. Offsetting these obligations, it had cash of US$2.96b as well as receivables valued at US$533.3m due within 12 months. So it can boast US$1.49b 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. Succinctly put, Datadog boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Datadog turned things around in the last 12 months, delivering and EBIT of US$48m. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Datadog may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Datadog actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Datadog has US$2.22b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 1,392% of that EBIT to free cash flow, bringing in US$670m. So we don't think Datadog's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Datadog you should be aware of.

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.