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.' 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. As with many other companies PagerDuty, Inc. (NYSE:PD) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
Check out our latest analysis for PagerDuty
How Much Debt Does PagerDuty Carry?
As you can see below, PagerDuty had US$283.8m of debt, at July 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$504.5m in cash, leading to a US$220.6m net cash position.
How Healthy Is PagerDuty's Balance Sheet?
We can see from the most recent balance sheet that PagerDuty had liabilities of US$239.6m falling due within a year, and liabilities of US$303.0m due beyond that. Offsetting this, it had US$504.5m in cash and US$65.6m in receivables that were due within 12 months. So it actually has US$27.5m more liquid assets than total liabilities.
This state of affairs indicates that PagerDuty'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$2.00b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, PagerDuty boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine PagerDuty's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, PagerDuty reported revenue of US$406m, which is a gain of 25%, 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 PagerDuty?
While PagerDuty lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$43m. 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. We think its revenue growth of 25% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for PagerDuty you should be aware of.
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.