Palo Alto Networks (NASDAQ:PANW) Seems To Use Debt Rather Sparingly

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. As with many other companies Palo Alto Networks, Inc. (NASDAQ:PANW) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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 Palo Alto Networks

How Much Debt Does Palo Alto Networks Carry?

As you can see below, Palo Alto Networks had US$1.16b of debt at April 2024, down from US$3.68b a year prior. However, it does have US$2.89b in cash offsetting this, leading to net cash of US$1.73b.

How Healthy Is Palo Alto Networks' Balance Sheet?

We can see from the most recent balance sheet that Palo Alto Networks had liabilities of US$7.08b falling due within a year, and liabilities of US$6.38b due beyond that. Offsetting these obligations, it had cash of US$2.89b as well as receivables valued at US$2.29b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.28b.

Since publicly traded Palo Alto Networks shares are worth a very impressive total of US$110.5b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Palo Alto Networks also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Palo Alto Networks grew its EBIT by 489% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Palo Alto Networks 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Palo Alto Networks 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. Over the last two years, Palo Alto Networks actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Palo Alto Networks's liabilities, but we can be reassured by the fact it has has net cash of US$1.73b. The cherry on top was that in converted 559% of that EBIT to free cash flow, bringing in US$3.0b. So is Palo Alto Networks's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Palo Alto Networks (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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