Pure Storage (NYSE:PSTG) Is Using Debt In A Risky Way

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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.' 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. Importantly, Pure Storage, Inc. (NYSE:PSTG) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Pure Storage

What Is Pure Storage's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of April 2019 Pure Storage had US$456.3m of debt, an increase on US$430.3m, over one year. But it also has US$1.17b in cash to offset that, meaning it has US$709.8m net cash.

How Strong Is Pure Storage's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pure Storage had liabilities of US$480.0m due within 12 months and liabilities of US$845.3m due beyond that. On the other hand, it had cash of US$1.17b and US$311.8m worth of receivables due within a year. So it actually has US$152.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Pure Storage could probably pay off its debt with ease, as its balance sheet is far from stretched. Pure Storage 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 Pure Storage 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 Pure Storage managed to grow its revenue by 30%, to US$1.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Pure Storage?

Although Pure Storage had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$50m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 30% 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. For riskier companies like Pure Storage I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.