We Think Pegasystems (NASDAQ:PEGA) Can Manage Its Debt With Ease

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.' 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. We note that Pegasystems Inc. (NASDAQ:PEGA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Pegasystems

What Is Pegasystems's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Pegasystems had US$500.0m of debt in March 2024, down from US$561.7m, one year before. However, its balance sheet shows it holds US$618.9m in cash, so it actually has US$119.0m net cash.

A Look At Pegasystems' Liabilities

According to the last reported balance sheet, Pegasystems had liabilities of US$1.04b due within 12 months, and liabilities of US$77.3m due beyond 12 months. Offsetting these obligations, it had cash of US$618.9m as well as receivables valued at US$394.9m due within 12 months. So its liabilities total US$107.7m more than the combination of its cash and short-term receivables.

Since publicly traded Pegasystems shares are worth a total of US$5.35b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Pegasystems also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Pegasystems made a loss at the EBIT level, last year, it was also good to see that it generated US$136m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Pegasystems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Pegasystems has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Pegasystems actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Pegasystems's liabilities, but we can be reassured by the fact it has has net cash of US$119.0m. And it impressed us with free cash flow of US$324m, being 239% of its EBIT. So we don't think Pegasystems's use of debt is risky. 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 example, we've discovered 3 warning signs for Pegasystems that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.