David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Vertex, Inc. (NASDAQ:VERX) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Vertex's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Vertex had US$46.6m of debt in December 2023, down from US$48.9m, one year before. However, its balance sheet shows it holds US$77.7m in cash, so it actually has US$31.2m net cash.

How Healthy Is Vertex's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vertex had liabilities of US$440.8m due within 12 months and liabilities of US$66.2m due beyond that. Offsetting this, it had US$77.7m in cash and US$141.8m in receivables that were due within 12 months. So it has liabilities totalling US$287.5m more than its cash and near-term receivables, combined.

Given Vertex has a market capitalization of US$4.60b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Vertex also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Vertex 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.

In the last year Vertex wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to US$572m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Vertex?

Although Vertex had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$6.1m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Vertex you should be aware of.

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.