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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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that PagerDuty, Inc. (NYSE:PD) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 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 PagerDuty's Debt?
You can click the graphic below for the historical numbers, but it shows that as of July 2020 PagerDuty had US$211.0m of debt, an increase on none, over one year. But it also has US$601.6m in cash to offset that, meaning it has US$390.6m net cash.
How Healthy Is PagerDuty's Balance Sheet?
The latest balance sheet data shows that PagerDuty had liabilities of US$129.8m due within a year, and liabilities of US$247.5m falling due after that. Offsetting this, it had US$601.6m in cash and US$37.4m in receivables that were due within 12 months. So it can boast US$261.7m more liquid assets than total liabilities.
This surplus suggests that PagerDuty has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, PagerDuty 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 PagerDuty 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, PagerDuty reported revenue of US$189m, which is a gain of 32%, 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$538k. 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. Keeping in mind its 32% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for PagerDuty (of which 1 is a bit concerning!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
This article by Simply Wall St is general in nature. 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.
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