Is PureTech Health (LON:PRTC) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that PureTech Health plc (LON:PRTC) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for PureTech Health

What Is PureTech Health's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 PureTech Health had US$43.7m of debt, an increase on US$1.46m, over one year. However, its balance sheet shows it holds US$441.9m in cash, so it actually has US$398.2m net cash.

How Strong Is PureTech Health's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PureTech Health had liabilities of US$213.9m due within 12 months and liabilities of US$121.6m due beyond that. Offsetting these obligations, it had cash of US$441.9m as well as receivables valued at US$3.84m due within 12 months. So it can boast US$110.2m more liquid assets than total liabilities.

This surplus suggests that PureTech Health has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, PureTech Health boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

In the last year PureTech Health had a loss before interest and tax, and actually shrunk its revenue by 12%, to US$11m. We would much prefer see growth.

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 in the last year PureTech Health had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$147m and booked a US$193m accounting loss. Given it only has net cash of US$398.2m, the company may need to raise more capital if it doesn't reach break-even soon. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with PureTech Health .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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