Is Snowflake $SNOW (+1,36%) a risky investment?
External fund manager Li Lu, backed by Berkshire Hathaway's Charlie Munger, doesn't mince his words when he says: "The biggest investment risk is not price volatility, 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 how it takes on debt, because over-indebtedness can lead to ruin. We can see that Snowflake Inc ( $SNOW ) uses debt in its business. However, the more important question is: How much risk does this debt pose?
When is debt a problem?
In general, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or through its own cash flow. If the company cannot meet its legal obligations to repay the debt, shareholders are ultimately left empty-handed. However, a more common (but still costly) case is where a company has to issue shares at knock-down prices, permanently diluting shareholders, just to shore up its balance sheet. Most commonly, however, a company manages its debt reasonably well - and to its own advantage. When considering how much debt a company has, the first thing to look at is cash and debt together.
What is Snowflake's debt level?
As you can see below, Snowflake had $2.27 billion in debt at the end of October 2024, whereas a year ago it had no debt. Click on the image to see more details. However, this is offset by US$4.16 billion in cash, which means a net cash balance of US$1.89 billion.
How healthy is Snowflake's balance sheet?
The most recent balance sheet shows that Snowflake has liabilities of US$2.65 billion within one year and liabilities of US$2.62 billion thereafter. This compares with US$4.16 billion in cash and US$618.9 million in receivables due within 12 months. Its liabilities therefore exceed the sum of its cash and (current) receivables by US$ 492.0 million.
Given the size of Snowflake, its cash and cash equivalents appear to be in balance with its total liabilities. So it's very unlikely that the US$56.4 billion company is short of cash, but it's still worth keeping an eye on the balance sheet. Despite its considerable liabilities, Snowflake has net cash, so it's fair to say that the company doesn't have a heavy debt load! The balance sheet is clearly the area to focus on when analyzing debt. Ultimately, however, the future profitability of the company will determine whether Snowflake can strengthen its balance sheet over time.
On a 12-month view, Snowflake reported revenue of $3.4 billion, up 30%, although the company did not report earnings before interest and taxes. With any luck, the company will be able to find its way to profitability.
So how risky is Snowflake?
Snowflake lost money at the earnings before interest and tax (EBIT) level, but generated positive free cash flow of $793 million. So although Snowflake is making losses, the company does not appear to have too much short-term balance sheet risk given its net cash position. The good news for Snowflake shareholders is that the company is experiencing strong revenue growth, which will make it easier to raise capital when needed. However, this does not change our view that the stock is risky. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, any company can have off-balance sheet risks.
How do you see it? Who is invested?
