Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, PDF Solutions, Inc. (NASDAQ:PDFS) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
What Is PDF Solutions's Debt?
The image below, which you can click on for greater detail, shows that at March 2025 PDF Solutions had debt of US$68.7m, up from none in one year. However, because it has a cash reserve of US$54.1m, its net debt is less, at about US$14.5m.
A Look At PDF Solutions' Liabilities
Zooming in on the latest balance sheet data, we can see that PDF Solutions had liabilities of US$64.3m due within 12 months and liabilities of US$76.7m due beyond that. Offsetting this, it had US$54.1m in cash and US$75.4m in receivables that were due within 12 months. So it has liabilities totalling US$11.5m more than its cash and near-term receivables, combined.
This state of affairs indicates that PDF Solutions' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$827.8m company is short on cash, but still worth keeping an eye on the balance sheet. 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 PDF Solutions 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.
Check out our latest analysis for PDF Solutions
Over 12 months, PDF Solutions reported revenue of US$186m, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, PDF Solutions had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$660k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$3.8m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - PDF Solutions has 1 warning sign we think you should be aware of.
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.