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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Snowflake Inc. (NYSE:SNOW) does carry debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Snowflake's Debt?

The image below, which you can click on for greater detail, shows that at January 2025 Snowflake had debt of US$2.27b, up from none in one year. But on the other hand it also has US$4.64b in cash, leading to a US$2.37b net cash position.NYSE:SNOW Debt to Equity History May 14th 2025

A Look At Snowflake's Liabilities

We can see from the most recent balance sheet that Snowflake had liabilities of US$3.30b falling due within a year, and liabilities of US$2.73b due beyond that. On the other hand, it had cash of US$4.64b and US$946.4m worth of receivables due within a year. So it has liabilities totalling US$443.2m more than its cash and near-term receivables, combined.

Having regard to Snowflake'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$60.2b company is struggling for cash, we still think it's worth monitoring its 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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View our latest analysis for Snowflake

Over 12 months, Snowflake reported revenue of US$3.6b, which is a gain of 29%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Snowflake?

While Snowflake lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$884m. 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. 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. For example, we've discovered 1 warning sign for Snowflake that you should be aware of before investing here.

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.

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