Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that PagerDuty, Inc. (NYSE:PD) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is PagerDuty's Debt?

As you can see below, PagerDuty had US$450.0m of debt, at October 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$542.2m in cash offsetting this, leading to net cash of US$92.1m.

How Strong Is PagerDuty's Balance Sheet?

We can see from the most recent balance sheet that PagerDuty had liabilities of US$332.3m falling due within a year, and liabilities of US$406.3m due beyond that. Offsetting this, it had US$542.2m in cash and US$75.2m in receivables that were due within 12 months. So it has liabilities totalling US$121.3m more than its cash and near-term receivables, combined.

Since publicly traded PagerDuty shares are worth a total of US$1.61b, it seems unlikely that this level of liabilities would be a major 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 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 8.7%, to US$457m. 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$99m. 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for PagerDuty you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.