The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Pluralsight, Inc. (NASDAQ:PS) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Pluralsight's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Pluralsight had US$487.9m of debt, an increase on US$7.51m, over one year. But it also has US$537.1m in cash to offset that, meaning it has US$49.2m net cash.
How Healthy Is Pluralsight's Balance Sheet?
The latest balance sheet data shows that Pluralsight had liabilities of US$221.6m due within a year, and liabilities of US$535.3m falling due after that. On the other hand, it had cash of US$537.1m and US$57.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$162.1m.
Since publicly traded Pluralsight shares are worth a total of US$2.43b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Pluralsight 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 Pluralsight 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.
In the last year Pluralsight managed to grow its revenue by 41%, to US$274m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Pluralsight?
Although Pluralsight had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of US$147m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive is that Pluralsight is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Pluralsight insider transactions.
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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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.