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

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. As with many other companies Varonis Systems, Inc. (NASDAQ:VRNS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Varonis Systems

What Is Varonis Systems's Net Debt?

As you can see below, Varonis Systems had US$249.3m of debt, at March 2023, 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$756.3m in cash, leading to a US$506.9m net cash position.

How Strong Is Varonis Systems' Balance Sheet?

The latest balance sheet data shows that Varonis Systems had liabilities of US$217.3m due within a year, and liabilities of US$312.7m falling due after that. Offsetting this, it had US$756.3m in cash and US$75.4m in receivables that were due within 12 months. So it actually has US$301.6m 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! 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 18%, to US$485m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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$15m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. We've identified 1 warning sign with Varonis Systems , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.