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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that PagerDuty, Inc. (NYSE:PD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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. But it also has US$575.3m in cash to offset that, meaning it has US$127.9m net cash.

How Strong Is PagerDuty's Balance Sheet?

We can see from the most recent balance sheet that PagerDuty had liabilities of US$247.9m falling due within a year, and liabilities of US$464.2m due beyond that. On the other hand, it had cash of US$575.3m and US$71.1m worth of receivables due within a year. So it has liabilities totalling US$65.7m more than its cash and near-term receivables, combined.

Given PagerDuty has a market capitalization of US$2.27b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, PagerDuty boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year PagerDuty wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to US$421m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is PagerDuty?

While PagerDuty lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow 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. One positive is that PagerDuty is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is 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. Case in point: We've spotted 2 warning signs for PagerDuty you should be aware of.

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.