Health Check: How Prudently Does PagerDuty (NYSE:PD) Use Debt?

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. As with many other companies PagerDuty, Inc. (NYSE:PD) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for PagerDuty

What Is PagerDuty's Debt?

As you can see below, PagerDuty had US$283.8m of debt, at July 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$504.5m in cash, leading to a US$220.6m net cash position.

How Healthy Is PagerDuty's Balance Sheet?

The latest balance sheet data shows that PagerDuty had liabilities of US$239.6m due within a year, and liabilities of US$303.0m falling due after that. On the other hand, it had cash of US$504.5m and US$65.6m worth of receivables due within a year. So it actually has US$27.5m more liquid assets than total liabilities.

This state of affairs indicates that PagerDuty's 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$2.00b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, PagerDuty boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

In the last year PagerDuty wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to US$406m. 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$43m. 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. We think its revenue growth of 25% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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 - PagerDuty has 2 warning signs we think you should be aware of.

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.

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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.