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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Varonis Systems, Inc. (NASDAQ:VRNS) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Varonis Systems's Net Debt?
The chart below, which you can click on for greater detail, shows that Varonis Systems had US$225.3m in debt in December 2021; about the same as the year before. But it also has US$807.9m in cash to offset that, meaning it has US$582.6m 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$211.8m due within 12 months and liabilities of US$300.2m due beyond that. On the other hand, it had cash of US$807.9m and US$120.5m worth of receivables due within a year. So it actually has US$416.5m 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. 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 Varonis Systems 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.
Over 12 months, Varonis Systems reported revenue of US$390m, which is a gain of 33%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Varonis Systems?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Varonis Systems had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$3.3m of cash and made a loss of US$117m. But the saving grace is the US$582.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Varonis Systems is showing 3 warning signs in our investment analysis , you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.