Is Pulse Biosciences (NASDAQ:PLSE) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Pulse Biosciences, Inc. (NASDAQ:PLSE) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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, 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.

See our latest analysis for Pulse Biosciences

What Is Pulse Biosciences's Debt?

As you can see below, at the end of June 2021, Pulse Biosciences had US$1.73m of debt, up from none a year ago. Click the image for more detail. However, it does have US$47.4m in cash offsetting this, leading to net cash of US$45.7m.

A Look At Pulse Biosciences' Liabilities

According to the last reported balance sheet, Pulse Biosciences had liabilities of US$9.84m due within 12 months, and liabilities of US$10.4m due beyond 12 months. On the other hand, it had cash of US$47.4m and US$8.37m worth of receivables due within a year. So it actually has US$35.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Pulse Biosciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Pulse Biosciences has more cash than debt is arguably a good indication that 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 Pulse Biosciences'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.

Given its lack of meaningful operating revenue, Pulse Biosciences shareholders no doubt hope it can fund itself until it can sell some of its new medical technology.

So How Risky Is Pulse Biosciences?

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 Pulse Biosciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$46m of cash and made a loss of US$61m. With only US$45.7m on the balance sheet, it would appear that its going to need to raise capital again 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. 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. We've identified 4 warning signs with Pulse Biosciences (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

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.

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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