Is PureTech Health (LON:PRTC) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that PureTech Health plc (LON:PRTC) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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.

See our latest analysis for PureTech Health

What Is PureTech Health's Net Debt?

The image below, which you can click on for greater detail, shows that PureTech Health had debt of US$19.0m at the end of December 2021, a reduction from US$41.3m over a year. However, its balance sheet shows it holds US$465.7m in cash, so it actually has US$446.7m net cash.

A Look At PureTech Health's Liabilities

According to the last reported balance sheet, PureTech Health had liabilities of US$226.1m due within 12 months, and liabilities of US$135.7m due beyond 12 months. Offsetting these obligations, it had cash of US$465.7m as well as receivables valued at US$23.2m due within 12 months. So it can boast US$127.1m more liquid assets than total liabilities.

This surplus suggests that PureTech Health is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that PureTech Health has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine PureTech Health's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, PureTech Health reported revenue of US$17m, which is a gain of 48%, 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 PureTech Health?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months PureTech Health lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$164m and booked a US$61m accounting loss. Given it only has net cash of US$446.7m, the company may need to raise more capital if it doesn't reach break-even soon. PureTech Health's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that PureTech Health is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.

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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.