Is Rocket Lab USA (NASDAQ:RKLB) Using Debt Sensibly?

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 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 Rocket Lab USA, Inc. (NASDAQ:RKLB) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Rocket Lab USA

What Is Rocket Lab USA's Net Debt?

As you can see below, at the end of September 2024, Rocket Lab USA had US$403.5m of debt, up from US$105.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$442.4m in cash, so it actually has US$38.9m net cash.

How Healthy 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$269.2m due within 12 months and liabilities of US$464.0m due beyond that. Offsetting these obligations, it had cash of US$442.4m as well as receivables valued at US$83.0m due within 12 months. So its liabilities total US$207.8m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Rocket Lab USA's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$13.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Rocket Lab USA also has more cash than debt, so we're pretty confident 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 Rocket Lab USA'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 Rocket Lab USA wasn't profitable at an EBIT level, but managed to grow its revenue by 54%, to US$364m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Rocket Lab USA?

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 Rocket Lab USA lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$145m of cash and made a loss of US$188m. But the saving grace is the US$38.9m on the balance sheet. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Rocket Lab USA you should be aware of.

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.