Would Extreme Networks (NASDAQ:EXTR) Be Better Off With Less Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Extreme Networks, Inc. (NASDAQ:EXTR) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Extreme Networks

How Much Debt Does Extreme Networks Carry?

As you can see below, Extreme Networks had US$184.9m of debt at September 2024, down from US$194.6m a year prior. However, it does have US$159.5m in cash offsetting this, leading to net debt of about US$25.4m.

A Look At Extreme Networks' Liabilities

According to the last reported balance sheet, Extreme Networks had liabilities of US$526.4m due within 12 months, and liabilities of US$497.4m due beyond 12 months. Offsetting this, it had US$159.5m in cash and US$97.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$767.0m.

Extreme Networks has a market capitalization of US$2.40b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Carrying virtually no net debt, Extreme Networks has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Extreme Networks can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Extreme Networks had a loss before interest and tax, and actually shrunk its revenue by 24%, to US$1.0b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Extreme Networks's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$71m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$22m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Extreme Networks insider transactions.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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