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

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. We can see that Varonis Systems, Inc. (NASDAQ:VRNS) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Varonis Systems

What Is Varonis Systems's Debt?

The chart below, which you can click on for greater detail, shows that Varonis Systems had US$250.5m in debt in December 2023; about the same as the year before. However, its balance sheet shows it holds US$534.8m in cash, so it actually has US$284.3m net cash.

A Look At Varonis Systems' Liabilities

According to the last reported balance sheet, Varonis Systems had liabilities of US$306.8m due within 12 months, and liabilities of US$307.5m due beyond 12 months. On the other hand, it had cash of US$534.8m and US$184.5m worth of receivables due within a year. So it actually has US$105.0m more liquid assets than total liabilities.

Having regard to Varonis Systems' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$5.36b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Varonis Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 5.4%, to US$499m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Varonis Systems?

While Varonis Systems lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$54m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. 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.

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.

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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.