David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Rocket Lab USA, Inc. (NASDAQ:RKLB) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Rocket Lab USA's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Rocket Lab USA had US$405.8m of debt, an increase on US$104.4m, over one year. But it also has US$496.8m in cash to offset that, meaning it has US$91.0m net cash.

How Healthy Is Rocket Lab USA's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rocket Lab USA had liabilities of US$266.4m due within 12 months and liabilities of US$467.0m due beyond that. On the other hand, it had cash of US$496.8m and US$83.1m worth of receivables due within a year. So it has liabilities totalling US$153.6m more than its cash and near-term receivables, combined.

Since publicly traded Rocket Lab USA shares are worth a total of US$3.56b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Rocket Lab USA boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Rocket Lab USA's ability to maintain a healthy balance sheet going forward.

Over 12 months, Rocket Lab USA reported revenue of US$327m, which is a gain of 41%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Rocket Lab USA?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Rocket Lab USA lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$149m of cash and made a loss of US$177m. But the saving grace is the US$91.0m 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, Rocket Lab USA may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet.

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.