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.' 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 can see that Snowflake Inc. (NYSE:SNOW) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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. However, it does have US$4.16b in cash offsetting this, leading to net cash of US$1.89b.

How Healthy Is Snowflake's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Snowflake had liabilities of US$2.65b due within 12 months 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.

This state of affairs indicates that Snowflake'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$57.7b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Snowflake also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Snowflake 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.

In the last year Snowflake wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to US$3.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.

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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Snowflake you should be aware of, and 1 of them is significant.

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.