Warren Buffett famously said, '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. As with many other companies PagerDuty, Inc. (NYSE:PD) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

How Much Debt Does PagerDuty Carry?

You can click the graphic below for the historical numbers, but it shows that as of April 2024 PagerDuty had US$448.7m of debt, an increase on US$283.4m, over one year. But on the other hand it also has US$592.8m in cash, leading to a US$144.1m net cash position.

A Look At PagerDuty's Liabilities

According to the last reported balance sheet, PagerDuty had liabilities of US$273.1m due within 12 months, and liabilities of US$462.9m due beyond 12 months. Offsetting these obligations, it had cash of US$592.8m as well as receivables valued at US$77.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$65.7m.

Given PagerDuty has a market capitalization of US$1.80b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 it is future earnings, more than anything, that will determine PagerDuty's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year PagerDuty wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to US$439m. We usually like to see faster growth from unprofitable companies, but each to their own.

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$71m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for PagerDuty that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.