Is Varonis Systems (NASDAQ:VRNS) Weighed On By Its Debt Load?

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 more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Varonis Systems

What Is Varonis Systems's Debt?

As you can see below, at the end of March 2022, Varonis Systems had US$247.8m of debt, up from US$220.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$804.1m in cash, so it actually has US$556.2m net cash.

How Strong Is Varonis Systems' Balance Sheet?

The latest balance sheet data shows that Varonis Systems had liabilities of US$196.1m due within a year, and liabilities of US$319.7m falling due after that. Offsetting these obligations, it had cash of US$804.1m as well as receivables valued at US$63.6m due within 12 months. So it actually has US$351.9m 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. 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'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 31%, to US$412m. 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 the fact is that over the last twelve months Varonis Systems lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$1.5m of cash and made a loss of US$130m. But the saving grace is the US$556.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Varonis Systems may be on a path to profitability. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Varonis Systems you should be aware of.

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.