Pagaya Technologies (NASDAQ:PGY) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Pagaya Technologies Ltd. (NASDAQ:PGY) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Pagaya Technologies

What Is Pagaya Technologies's Debt?

As you can see below, at the end of September 2023, Pagaya Technologies had US$371.5m of debt, up from US$113.8m a year ago. Click the image for more detail. However, it also had US$252.8m in cash, and so its net debt is US$118.7m.

How Strong Is Pagaya Technologies' Balance Sheet?

We can see from the most recent balance sheet that Pagaya Technologies had liabilities of US$81.6m falling due within a year, and liabilities of US$392.5m due beyond that. On the other hand, it had cash of US$252.8m and US$71.5m worth of receivables due within a year. So its liabilities total US$149.7m more than the combination of its cash and short-term receivables.

Of course, Pagaya Technologies has a market capitalization of US$975.2m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pagaya Technologies'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.

In the last year Pagaya Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to US$787m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Pagaya Technologies produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$62m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$31m of cash over the last year. So to be blunt we think it is 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. Case in point: We've spotted 2 warning signs for Pagaya Technologies you should be aware of.

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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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.