Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Phreesia, Inc. (NYSE:PHR) does use debt in its business. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Phreesia's Debt?
As you can see below, at the end of January 2024, Phreesia had US$3.15m of debt, up from US$246.0k a year ago. Click the image for more detail. But on the other hand it also has US$87.5m in cash, leading to a US$84.4m net cash position.
How Healthy Is Phreesia's Balance Sheet?
The latest balance sheet data shows that Phreesia had liabilities of US$110.1m due within a year, and liabilities of US$8.76m falling due after that. On the other hand, it had cash of US$87.5m and US$64.9m worth of receivables due within a year. So it actually has US$33.5m more liquid assets than total liabilities.
This surplus suggests that Phreesia has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Phreesia has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Phreesia 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.
Over 12 months, Phreesia reported revenue of US$356m, which is a gain of 27%, 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 Phreesia?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Phreesia lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$57m and booked a US$137m accounting loss. However, it has net cash of US$84.4m, so it has a bit of time before it will need more capital. Phreesia'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 Phreesia you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.