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, Pulmonx Corporation (NASDAQ:LUNG) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Pulmonx's Net Debt?

The chart below, which you can click on for greater detail, shows that Pulmonx had US$37.2m in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds US$114.5m in cash, so it actually has US$77.3m net cash.

How Strong Is Pulmonx's Balance Sheet?

The latest balance sheet data shows that Pulmonx had liabilities of US$16.3m due within a year, and liabilities of US$55.1m falling due after that. Offsetting this, it had US$114.5m in cash and US$11.8m in receivables that were due within 12 months. So it can boast US$54.9m more liquid assets than total liabilities.

It's good to see that Pulmonx has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Pulmonx boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Pulmonx's ability to maintain a healthy balance sheet going forward. 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, Pulmonx reported revenue of US$77m, which is a gain of 26%, 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 Pulmonx?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Pulmonx lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$36m of cash and made a loss of US$58m. While this does make the company a bit risky, it's important to remember it has net cash of US$77.3m. That kitty means the company can keep spending for growth for at least two years, at current rates. Pulmonx'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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Pulmonx , and understanding them should be part of your investment process.

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.