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

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. We can see that PagerDuty, Inc. (NYSE:PD) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for PagerDuty

How Much Debt Does PagerDuty Carry?

As you can see below, PagerDuty had US$450.0m of debt, at October 2024, 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$542.2m in cash, leading to a US$92.1m net cash position.

How Healthy Is PagerDuty's Balance Sheet?

According to the last reported balance sheet, PagerDuty had liabilities of US$332.3m due within 12 months, and liabilities of US$406.3m due beyond 12 months. Offsetting this, it had US$542.2m in cash and US$75.2m in receivables that were due within 12 months. So its liabilities total US$121.3m more than the combination of its cash and short-term receivables.

Of course, PagerDuty has a market capitalization of US$1.48b, 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. Despite its noteworthy liabilities, PagerDuty boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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$457m, which is a gain of 8.7%, 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.

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$99m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For example - PagerDuty has 1 warning sign we think 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.