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 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 note that Confluent, Inc. (NASDAQ:CFLT) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

What Is Confluent's Net Debt?

The chart below, which you can click on for greater detail, shows that Confluent had US$1.09b in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds US$1.86b in cash, so it actually has US$768.3m net cash.

A Look At Confluent's Liabilities

According to the last reported balance sheet, Confluent had liabilities of US$535.0m due within 12 months, and liabilities of US$1.14b due beyond 12 months. Offsetting this, it had US$1.86b in cash and US$278.7m in receivables that were due within 12 months. So it can boast US$464.5m more liquid assets than total liabilities.

This surplus suggests that Confluent has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Confluent boasts net cash, so it's fair to say it does not have a heavy debt load! 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Confluent reported revenue of US$916m, which is a gain of 25%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Confluent?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Confluent lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$13m and booked a US$351m accounting loss. But the saving grace is the US$768.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Confluent may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Confluent , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.