Is Pulmonx (NASDAQ:LUNG) Using Debt In A Risky Way?

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.' 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. Importantly, Pulmonx Corporation (NASDAQ:LUNG) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Pulmonx

What Is Pulmonx's Debt?

The chart below, which you can click on for greater detail, shows that Pulmonx had US$37.2m in debt in June 2024; about the same as the year before. But on the other hand it also has US$114.5m in cash, leading to a US$77.3m net cash position.

How Healthy Is Pulmonx's Balance Sheet?

We can see from the most recent balance sheet that Pulmonx had liabilities of US$16.3m falling due within a year, and liabilities of US$55.1m due beyond that. On the other hand, it had cash of US$114.5m and US$11.8m worth of receivables due within a year. So it can boast US$54.9m more liquid assets than total liabilities.

It's good to see that Pulmonx has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Pulmonx 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 Pulmonx 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.

Over 12 months, Pulmonx reported revenue of US$77m, which is a gain of 26%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Pulmonx?

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 Pulmonx 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$36m and booked a US$58m accounting loss. But the saving grace is the US$77.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Pulmonx may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Pulmonx that 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.