Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Okta, Inc. (NASDAQ:OKTA) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Okta's Debt?

As you can see below, Okta had US$1.11b of debt at July 2024, down from US$1.45b a year prior. However, its balance sheet shows it holds US$2.36b in cash, so it actually has US$1.25b net cash.

A Look At Okta's Liabilities

Zooming in on the latest balance sheet data, we can see that Okta had liabilities of US$1.66b due within 12 months and liabilities of US$1.27b due beyond that. Offsetting these obligations, it had cash of US$2.36b as well as receivables valued at US$400.0m due within 12 months. So it has liabilities totalling US$176.0m more than its cash and near-term receivables, combined.

This state of affairs indicates that Okta's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$12.7b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Okta 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 Okta 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 Okta wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to US$2.5b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Okta?

While Okta lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$607m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For example, we've discovered 1 warning sign for Okta that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.