Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that MongoDB, Inc. (NASDAQ:MDB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
See our latest analysis for MongoDB
What Is MongoDB's Debt?
The chart below, which you can click on for greater detail, shows that MongoDB had US$1.14b in debt in July 2023; about the same as the year before. However, its balance sheet shows it holds US$1.90b in cash, so it actually has US$759.5m net cash.
How Healthy Is MongoDB's Balance Sheet?
We can see from the most recent balance sheet that MongoDB had liabilities of US$512.3m falling due within a year, and liabilities of US$1.25b due beyond that. Offsetting this, it had US$1.90b in cash and US$272.4m in receivables that were due within 12 months. So it can boast US$410.3m more liquid assets than total liabilities.
Having regard to MongoDB's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$29.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, MongoDB reported revenue of US$1.5b, which is a gain of 37%, 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 MongoDB?
While MongoDB lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$45m. 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. Keeping in mind its 37% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. 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. Case in point: We've spotted 3 warning signs for MongoDB you should be aware of.
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.
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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.
