Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Phreesia, Inc. (NYSE:PHR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Phreesia's Debt?

You can click the graphic below for the historical numbers, but it shows that Phreesia had US$2.60m of debt in July 2024, down from US$3.88m, one year before. But it also has US$81.8m in cash to offset that, meaning it has US$79.2m net cash.

A Look At Phreesia's Liabilities

The latest balance sheet data shows that Phreesia had liabilities of US$102.0m due within a year, and liabilities of US$8.90m falling due after that. Offsetting this, it had US$81.8m in cash and US$61.3m in receivables that were due within 12 months. So it can boast US$32.2m more liquid assets than total liabilities.

This surplus suggests that Phreesia has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Phreesia 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 it is future earnings, more than anything, that will determine Phreesia'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.

In the last year Phreesia wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$390m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Phreesia?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Phreesia had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$25m of cash and made a loss of US$100m. But the saving grace is the US$79.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Phreesia may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great 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. For example - Phreesia has 3 warning signs we think you should be aware of.

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.