Health Check: How Cautiously Does Pure Storage (NYSE: PSTG) Use Debt?


Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Pure Storage, Inc. (NYSE: PSTG) uses debt. But should shareholders be concerned about its use of debt?

Why Does Debt Bring Risk?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest review for Pure Storage

What is Pure Storage’s debt?

The image below, which you can click for more details, shows that in August 2021, Pure Storage was in debt of $ 770.7 million, up from $ 491.1 million in a year. However, it has US $ 1.28 billion in cash offsetting this, leading to net cash of US $ 513.9 million.

NYSE: PSTG Debt to Equity History September 24, 2021

How strong is Pure Storage’s balance sheet?

We can see from the most recent balance sheet that Pure Storage had liabilities of US $ 754.7 million maturing within one year and liabilities of US $ 1.33 billion maturing beyond that. . In return, he had $ 1.28 billion in cash and $ 358.5 million in receivables due within 12 months. It therefore has a liability totaling US $ 443.2 million more than its cash and short-term receivables combined.

Of course, Pure Storage has a market cap of US $ 7.52 billion, so this liability is likely manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. Despite its notable liabilities, Pure Storage has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load! When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Pure Storage can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Year over 12 months, Pure Storage reported revenue of US $ 1.8 billion, a gain of 7.8%, although it reported no profit before interest and taxes. We generally like to see unprofitable businesses growing faster, but each in their own way.

So how risky is pure storage?

Although Pure Storage recorded a loss of earnings before interest and taxes (EBIT) over the past twelve months, it generated positive free cash flow of US $ 145 million. Thus, although it is in deficit, it does not appear to present too much short-term balance sheet risk, given the net cash position. Until we see positive EBIT, we remain a little cautious about the stock, especially given the rather modest revenue growth. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 4 warning signs for Pure Storage which you should know before investing here.

If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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