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.' 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. As with many other companies Rocket Lab USA, Inc. (NASDAQ:RKLB) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Rocket Lab USA's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Rocket Lab USA had debt of US$405.8m, up from US$104.4m in one year. However, it does have US$496.8m in cash offsetting this, leading to net cash of US$91.0m.

How Strong Is Rocket Lab USA's Balance Sheet?

We can see from the most recent balance sheet that Rocket Lab USA had liabilities of US$266.4m falling due within a year, and liabilities of US$467.0m due beyond that. Offsetting this, it had US$496.8m in cash and US$83.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$153.6m.

Since publicly traded Rocket Lab USA shares are worth a total of US$2.67b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Rocket Lab USA also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Rocket Lab USA 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, Rocket Lab USA reported revenue of US$327m, which is a gain of 41%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Rocket Lab USA?

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 Rocket Lab USA lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$149m and booked a US$177m accounting loss. But the saving grace is the US$91.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Rocket Lab USA's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 Rocket Lab USA is showing 2 warning signs in our investment analysis , you should know about...

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.