Does PagerDuty (NYSE:PD) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, PagerDuty, Inc. (NYSE:PD) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for PagerDuty

What Is PagerDuty's Net Debt?

As you can see below, PagerDuty had US$282.9m of debt, at January 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$477.0m in cash offsetting this, leading to net cash of US$194.1m.

A Look At PagerDuty's Liabilities

Zooming in on the latest balance sheet data, we can see that PagerDuty had liabilities of US$271.1m due within 12 months and liabilities of US$304.7m due beyond that. On the other hand, it had cash of US$477.0m and US$91.3m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to PagerDuty's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$2.83b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, PagerDuty also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 PagerDuty'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, PagerDuty reported revenue of US$371m, which is a gain of 32%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is PagerDuty?

Although PagerDuty had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$6.7m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that PagerDuty is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that PagerDuty is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.