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Is Pure Storage (NYSE:PSTG) Weighed On By Its Debt Load?

·3 min read

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Pure Storage, Inc. (NYSE:PSTG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Pure Storage

What Is Pure Storage's Net Debt?

As you can see below, at the end of February 2022, Pure Storage had US$786.8m of debt, up from US$755.8m a year ago. Click the image for more detail. However, it does have US$1.41b in cash offsetting this, leading to net cash of US$626.5m.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Pure Storage's Liabilities

We can see from the most recent balance sheet that Pure Storage had liabilities of US$952.3m falling due within a year, and liabilities of US$1.43b due beyond that. Offsetting this, it had US$1.41b in cash and US$542.1m in receivables that were due within 12 months. So its liabilities total US$425.6m more than the combination of its cash and short-term receivables.

Of course, Pure Storage has a market capitalization of US$9.17b, so these liabilities are probably manageable. 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, Pure Storage also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pure Storage's ability to maintain a healthy balance sheet going forward. 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, Pure Storage reported revenue of US$2.2b, which is a gain of 29%, 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 Pure Storage?

Although Pure Storage had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$308m. 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. The good news for Pure Storage shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Pure Storage that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.