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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that PureTech Health plc (LON:PRTC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for PureTech Health
What Is PureTech Health's Debt?
The image below, which you can click on for greater detail, shows that PureTech Health had debt of US$7.39m at the end of June 2019, a reduction from US$12.4m over a year. However, its balance sheet shows it holds US$204.2m in cash, so it actually has US$196.8m net cash.
A Look At PureTech Health's Liabilities
The latest balance sheet data shows that PureTech Health had liabilities of US$312.6m due within a year, and liabilities of US$98.1m falling due after that. Offsetting these obligations, it had cash of US$204.2m as well as receivables valued at US$5.96m due within 12 months. So its liabilities total US$200.5m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since PureTech Health has a market capitalization of US$960.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, PureTech Health also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine PureTech Health'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.