Is PureTech Health (LON:PRTC) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 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?

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. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for PureTech Health

How Much Debt Does PureTech Health Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 PureTech Health had US$124.7m of debt, an increase on US$106.1m, over one year. But on the other hand it also has US$500.4m in cash, leading to a US$375.7m net cash position.

How Strong Is PureTech Health's Balance Sheet?

According to the last reported balance sheet, PureTech Health had liabilities of US$138.3m due within 12 months, and liabilities of US$135.4m due beyond 12 months. Offsetting this, it had US$500.4m in cash and US$2.06m in receivables that were due within 12 months. So it can boast US$228.7m more liquid assets than total liabilities.

This luscious liquidity implies that PureTech Health's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that PureTech Health has more cash than debt is arguably a good indication that 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 PureTech Health'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.

Since PureTech Health doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is PureTech Health?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that PureTech Health had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$121m of cash and made a loss of US$82m. While this does make the company a bit risky, it's important to remember it has net cash of US$375.7m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should be aware of the 2 warning signs we've spotted with PureTech Health .

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.

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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.