These 4 Measures Indicate That Pure Storage (NYSE:PSTG) Is Using Debt Safely

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.' 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. Importantly, Pure Storage, Inc. (NYSE:PSTG) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Pure Storage

What Is Pure Storage's Debt?

You can click the graphic below for the historical numbers, but it shows that Pure Storage had US$100.0m of debt in February 2024, down from US$574.5m, one year before. However, it does have US$1.53b in cash offsetting this, leading to net cash of US$1.43b.

A Look At Pure Storage's Liabilities

The latest balance sheet data shows that Pure Storage had liabilities of US$1.37b due within a year, and liabilities of US$1.02b falling due after that. Offsetting these obligations, it had cash of US$1.53b as well as receivables valued at US$662.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$192.4m.

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$17.2b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Pure Storage also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Pure Storage has increased its EBIT by 4.9% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Pure Storage has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Pure Storage actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Pure Storage has US$1.43b in net cash. The cherry on top was that in converted 641% of that EBIT to free cash flow, bringing in US$483m. So is Pure Storage's debt a risk? It doesn't seem so to us. 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. Be aware that Pure Storage is showing 3 warning signs in our investment analysis , you should know about...

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.

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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.