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. Importantly, Pure Storage, Inc. (NYSE:PSTG) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Pure Storage's Debt?

The chart below, which you can click on for greater detail, shows that Pure Storage had US$100.0m in debt in May 2024; about the same as the year before. However, its balance sheet shows it holds US$1.72b in cash, so it actually has US$1.62b net cash.

A Look At Pure Storage's Liabilities

Zooming in on the latest balance sheet data, we can see that Pure Storage had liabilities of US$1.23b due within 12 months and liabilities of US$1.02b due beyond that. On the other hand, it had cash of US$1.72b and US$423.5m worth of receivables due within a year. So it has liabilities totalling US$102.2m more than its cash and near-term receivables, combined.

Having regard to Pure Storage's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$17.2b company is struggling for cash, we still think it's worth monitoring its 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.

Better yet, Pure Storage grew its EBIT by 650% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Pure Storage 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.

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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Pure Storage's liabilities, but we can be reassured by the fact it has has net cash of US$1.62b. And it impressed us with free cash flow of US$533m, being 715% of its EBIT. So we don't think Pure Storage's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Pure Storage .

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.

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