Is PagerDuty (NYSE:PD) A Risky Investment?

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 note that PagerDuty, Inc. (NYSE:PD) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

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What Is PagerDuty's Net Debt?

The chart below, which you can click on for greater detail, shows that PagerDuty had US$282.0m in debt in July 2022; about the same as the year before. However, its balance sheet shows it holds US$470.8m in cash, so it actually has US$188.8m net cash.

How Strong Is PagerDuty's Balance Sheet?

We can see from the most recent balance sheet that PagerDuty had liabilities of US$226.1m falling due within a year, and liabilities of US$306.6m due beyond that. On the other hand, it had cash of US$470.8m and US$59.3m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

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$2.09b 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. 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 PagerDuty 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.

Over 12 months, PagerDuty reported revenue of US$326m, which is a gain of 33%, 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months PagerDuty lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$6.3m of cash and made a loss of US$127m. Given it only has net cash of US$188.8m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, PagerDuty may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Be aware that PagerDuty is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.