Does Pegasystems (NASDAQ:PEGA) Have A Healthy Balance Sheet?

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.' 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, Pegasystems Inc. (NASDAQ:PEGA) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Pegasystems

What Is Pegasystems's Net Debt?

As you can see below, Pegasystems had US$591.4m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$332.2m in cash offsetting this, leading to net debt of about US$259.3m.

How Healthy Is Pegasystems' Balance Sheet?

We can see from the most recent balance sheet that Pegasystems had liabilities of US$435.0m falling due within a year, and liabilities of US$696.8m due beyond that. Offsetting these obligations, it had cash of US$332.2m as well as receivables valued at US$436.7m due within 12 months. So it has liabilities totalling US$363.0m more than its cash and near-term receivables, combined.

Given Pegasystems has a market capitalization of US$4.10b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Pegasystems'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.

Over 12 months, Pegasystems reported revenue of US$1.3b, which is a gain of 20%, 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, Pegasystems had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$78m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of US$57m into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Pegasystems is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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