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.' 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. We note that Rocket Lab USA, Inc. (NASDAQ:RKLB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Rocket Lab USA's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Rocket Lab USA had US$407.5m of debt, an increase on US$103.7m, over one year. But on the other hand it also has US$492.5m in cash, leading to a US$85.0m net cash position.

A Look At Rocket Lab USA's Liabilities

According to the last reported balance sheet, Rocket Lab USA had liabilities of US$232.5m due within 12 months, and liabilities of US$470.5m due beyond 12 months. Offsetting this, it had US$492.5m in cash and US$59.4m in receivables that were due within 12 months. So it has liabilities totalling US$151.0m more than its cash and near-term receivables, combined.

Since publicly traded Rocket Lab USA shares are worth a total of US$1.96b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Rocket Lab USA 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 ultimately the future profitability of the business will decide if Rocket Lab USA 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.

Over 12 months, Rocket Lab USA reported revenue of US$282m, which is a gain of 25%, 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 Rocket Lab USA?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Rocket Lab USA lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$137m and booked a US$181m accounting loss. But the saving grace is the US$85.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Rocket Lab USA's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great 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. To that end, you should be aware of the 2 warning signs we've spotted with Rocket Lab USA .

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.