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. We can see that Snowflake Inc. (NYSE:SNOW) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

See our latest analysis for Snowflake

What Is Snowflake's Net Debt?

The image below, which you can click on for greater detail, shows that at October 2024 Snowflake had debt of US$2.27b, up from none in one year. But on the other hand it also has US$4.16b in cash, leading to a US$1.89b net cash position.

How Healthy Is Snowflake's Balance Sheet?

We can see from the most recent balance sheet that Snowflake had liabilities of US$2.65b falling due within a year, and liabilities of US$2.62b due beyond that. Offsetting this, it had US$4.16b in cash and US$618.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$492.0m.

Having regard to Snowflake's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$53.8b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Snowflake 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 Snowflake 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 Snowflake wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to US$3.4b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Snowflake?

Although Snowflake had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$793m. 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. The good news for Snowflake shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. Case in point: We've spotted 3 warning signs for Snowflake you should be aware of, and 1 of them doesn't sit too well with us.

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.