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Is PureTech Health (LON:PRTC) Using Too Much Debt?

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.' 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. We note that PureTech Health plc (LON:PRTC) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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$19.0m at the end of December 2021, a reduction from US$41.3m over a year. However, its balance sheet shows it holds US$465.7m in cash, so it actually has US$446.7m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At PureTech Health's Liabilities

Zooming in on the latest balance sheet data, we can see that PureTech Health had liabilities of US$226.1m due within 12 months and liabilities of US$135.7m due beyond that. On the other hand, it had cash of US$465.7m and US$23.2m worth of receivables due within a year. So it can boast US$127.1m more liquid assets than total liabilities.

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This excess liquidity suggests that PureTech Health is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that PureTech Health has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if PureTech Health 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 PureTech Health wasn't profitable at an EBIT level, but managed to grow its revenue by 48%, to US$17m. With any luck the company will be able to grow its way to profitability.

So How Risky Is PureTech Health?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year PureTech Health had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$164m and booked a US$61m accounting loss. With only US$446.7m on the balance sheet, it would appear that its going to need to raise capital again soon. PureTech Health's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger 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. Case in point: We've spotted 2 warning signs for PureTech Health you should be aware of, and 1 of them doesn't sit too well with us.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.