Does Varonis Systems (NASDAQ:VRNS) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Varonis Systems, Inc. (NASDAQ:VRNS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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What Is Varonis Systems's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Varonis Systems had debt of US$248.2m, up from US$221.9m in one year. But it also has US$788.8m in cash to offset that, meaning it has US$540.5m net cash.

How Healthy Is Varonis Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Varonis Systems had liabilities of US$208.9m due within 12 months and liabilities of US$316.9m due beyond that. On the other hand, it had cash of US$788.8m and US$83.9m worth of receivables due within a year. So it can boast US$346.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Varonis Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Varonis Systems 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 Varonis Systems's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Varonis Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to US$435m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Varonis Systems?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Varonis Systems had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$8.4m and booked a US$133m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$540.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. Varonis Systems'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. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Varonis Systems you should know about.

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.