Health Check: How Prudently Does Varonis Systems (NASDAQ:VRNS) Use Debt?

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.' 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, Varonis Systems, Inc. (NASDAQ:VRNS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Varonis Systems

What Is Varonis Systems's Debt?

As you can see below, at the end of September 2022, Varonis Systems had US$248.6m of debt, up from US$223.6m a year ago. Click the image for more detail. But it also has US$790.4m in cash to offset that, meaning it has US$541.8m net cash.

A Look At Varonis Systems' Liabilities

We can see from the most recent balance sheet that Varonis Systems had liabilities of US$209.4m falling due within a year, and liabilities of US$316.8m due beyond that. Offsetting these obligations, it had cash of US$790.4m as well as receivables valued at US$91.7m due within 12 months. So it actually has US$355.8m more liquid assets than total liabilities.

This surplus suggests that Varonis Systems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 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$458m, which is a gain of 28%, 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$5.2m of cash and made a loss of US$139m. While this does make the company a bit risky, it's important to remember it has net cash of US$541.8m. 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. 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. For example, we've discovered 2 warning signs for Varonis Systems that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.