Is PagerDuty (NYSE:PD) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that PagerDuty, Inc. (NYSE:PD) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for PagerDuty

What Is PagerDuty's Net Debt?

As you can see below, at the end of October 2023, PagerDuty had US$447.4m of debt, up from US$282.4m a year ago. Click the image for more detail. However, it does have US$575.3m in cash offsetting this, leading to net cash of US$127.9m.

A Look At PagerDuty's Liabilities

The latest balance sheet data shows that PagerDuty had liabilities of US$247.9m due within a year, and liabilities of US$464.2m falling due after that. Offsetting this, it had US$575.3m in cash and US$71.1m in receivables that were due within 12 months. So it has liabilities totalling US$65.7m more than its cash and near-term receivables, combined.

Of course, PagerDuty has a market capitalization of US$2.18b, 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! When analysing debt levels, the balance sheet is the obvious place to start. 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 21%, to US$421m. 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$60m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for PagerDuty shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat 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. For example, we've discovered 2 warning signs for PagerDuty that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.