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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Pure Storage, Inc. (NYSE:PSTG) does carry debt. But is this debt a concern to shareholders?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Pure Storage's Net Debt?

The chart below, which you can click on for greater detail, shows that Pure Storage had US$100.0m in debt in November 2024; about the same as the year before. But on the other hand it also has US$1.65b in cash, leading to a US$1.55b net cash position.

A Look At Pure Storage's Liabilities

According to the last reported balance sheet, Pure Storage had liabilities of US$1.44b due within 12 months, and liabilities of US$999.2m due beyond 12 months. On the other hand, it had cash of US$1.65b and US$578.2m worth of receivables due within a year. So it has liabilities totalling US$217.1m 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 it's very unlikely that the US$21.1b company is short on cash, but still worth keeping an eye on the 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.

In addition to that, we're happy to report that Pure Storage has boosted its EBIT by 75%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Happily for any shareholders, Pure Storage actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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$1.55b. And it impressed us with free cash flow of US$575m, being 615% 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Pure Storage you should be aware of.

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.