Is Varonis Systems (NASDAQ:VRNS) Using Too Much Debt?

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.' 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 should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Varonis Systems

What Is Varonis Systems's Debt?

As you can see below, Varonis Systems had US$250.9m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$548.1m in cash, leading to a US$297.2m net cash position.

A Look At Varonis Systems' Liabilities

The latest balance sheet data shows that Varonis Systems had liabilities of US$297.2m due within a year, and liabilities of US$304.1m falling due after that. On the other hand, it had cash of US$548.1m and US$100.4m worth of receivables due within a year. So it actually has US$47.2m 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$5.13b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Varonis Systems boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 4.4%, to US$506m. 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$75m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Varonis Systems , and understanding them should be part of your investment process.

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.

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