Health Check: How Prudently Does Rocket Lab USA (NASDAQ:RKLB) Use Debt?

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. As with many other companies Rocket Lab USA, Inc. (NASDAQ:RKLB) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Rocket Lab USA

What Is Rocket Lab USA's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Rocket Lab USA had debt of US$407.5m, up from US$103.7m in one year. But on the other hand it also has US$492.5m in cash, leading to a US$85.0m net cash position.

How Strong Is Rocket Lab USA's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rocket Lab USA had liabilities of US$232.5m due within 12 months and liabilities of US$470.5m due beyond that. Offsetting this, it had US$492.5m in cash and US$59.4m in receivables that were due within 12 months. So it has liabilities totalling US$151.0m more than its cash and near-term receivables, combined.

Of course, Rocket Lab USA has a market capitalization of US$2.16b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Rocket Lab USA boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Rocket Lab USA 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 Rocket Lab USA wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to US$282m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Rocket Lab USA?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Rocket Lab USA lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$137m of cash and made a loss of US$181m. While this does make the company a bit risky, it's important to remember it has net cash of US$85.0m. That means it could keep spending at its current rate for more than two years. Rocket Lab USA'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. For example, we've discovered 2 warning signs for Rocket Lab USA that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.