Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Pulmonx Corporation (NASDAQ:LUNG) does use debt in its business. But should shareholders be worried about its use of debt?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Pulmonx's Net Debt?
As you can see below, at the end of December 2023, Pulmonx had US$37.2m of debt, up from US$17.3m a year ago. Click the image for more detail. But it also has US$117.1m in cash to offset that, meaning it has US$79.9m net cash.
How Strong Is Pulmonx's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Pulmonx had liabilities of US$23.2m due within 12 months and liabilities of US$36.3m due beyond that. Offsetting this, it had US$117.1m in cash and US$12.1m in receivables that were due within 12 months. So it actually has US$69.7m more liquid assets than total liabilities.
This surplus suggests that Pulmonx has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Pulmonx 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 it is future earnings, more than anything, that will determine Pulmonx's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Pulmonx reported revenue of US$69m, which is a gain of 28%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Pulmonx?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Pulmonx had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$40m and booked a US$61m accounting loss. But the saving grace is the US$79.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Pulmonx's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Pulmonx you should know about.
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.