Does CyberArk Software (NASDAQ:CYBR) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, CyberArk Software Ltd. (NASDAQ:CYBR) does carry debt. But is this debt a concern to shareholders?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CyberArk Software

How Much Debt Does CyberArk Software Carry?

As you can see below, at the end of September 2020, CyberArk Software had US$473.4m of debt, up from none a year ago. Click the image for more detail. However, it does have US$884.2m in cash offsetting this, leading to net cash of US$410.8m.

How Strong Is CyberArk Software's Balance Sheet?

The latest balance sheet data shows that CyberArk Software had liabilities of US$215.3m due within a year, and liabilities of US$601.8m falling due after that. On the other hand, it had cash of US$884.2m and US$63.3m worth of receivables due within a year. So it can boast US$130.4m more liquid assets than total liabilities.

This surplus suggests that CyberArk Software has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that CyberArk Software has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact CyberArk Software's saving grace is its low debt levels, because its EBIT has tanked 84% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CyberArk Software can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CyberArk Software has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, CyberArk Software actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that CyberArk Software has net cash of US$410.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$114m, being 321% of its EBIT. So we don't have any problem with CyberArk Software's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with CyberArk Software .

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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