Is Extreme Networks (NASDAQ:EXTR) 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.' 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, Extreme Networks, Inc. (NASDAQ:EXTR) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Extreme Networks

What Is Extreme Networks's Debt?

As you can see below, Extreme Networks had US$194.6m of debt at September 2023, down from US$267.4m a year prior. But it also has US$224.4m in cash to offset that, meaning it has US$29.8m net cash.

How Healthy Is Extreme Networks' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Extreme Networks had liabilities of US$528.7m due within 12 months and liabilities of US$469.3m due beyond that. Offsetting this, it had US$224.4m in cash and US$131.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$642.1m.

Extreme Networks has a market capitalization of US$2.25b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Extreme Networks also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Extreme Networks has boosted its EBIT by 86%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Extreme Networks'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Extreme Networks has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Extreme Networks actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Extreme Networks does have more liabilities than liquid assets, it also has net cash of US$29.8m. The cherry on top was that in converted 203% of that EBIT to free cash flow, bringing in US$260m. So is Extreme Networks's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Extreme Networks would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.