Does Pure Storage (NYSE:PSTG) 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.' 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 Pure Storage, Inc. (NYSE:PSTG) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Pure Storage

What Is Pure Storage's Debt?

As you can see below, Pure Storage had US$100.0m of debt at November 2023, down from US$573.9m a year prior. But it also has US$1.35b in cash to offset that, meaning it has US$1.25b net cash.

How Strong Is Pure Storage's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pure Storage had liabilities of US$1.24b due within 12 months and liabilities of US$969.2m due beyond that. On the other hand, it had cash of US$1.35b and US$636.3m worth of receivables due within a year. So its liabilities total US$219.7m more than the combination of its cash and short-term receivables.

Having regard to Pure Storage's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$13.3b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Pure Storage boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Pure Storage has boosted its EBIT by 60%, thus reducing the spectre of future debt repayments. 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 Pure Storage can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Pure Storage may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Pure Storage actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Pure Storage has US$1.25b in net cash. The cherry on top was that in converted 800% of that EBIT to free cash flow, bringing in US$455m. So we don't think Pure Storage's use of debt 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. For example, we've discovered 2 warning signs for Pure Storage that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.