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 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. We note that F5, Inc. (NASDAQ:FFIV) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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.
What Is F5's Debt?
You can click the graphic below for the historical numbers, but it shows that F5 had US$349.8m of debt in September 2022, down from US$369.0m, one year before. However, its balance sheet shows it holds US$884.6m in cash, so it actually has US$534.8m net cash.
How Strong Is F5's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that F5 had liabilities of US$1.84b due within 12 months and liabilities of US$967.3m due beyond that. Offsetting these obligations, it had cash of US$884.6m as well as receivables valued at US$789.7m due within 12 months. So it has liabilities totalling US$1.13b more than its cash and near-term receivables, combined.
Given F5 has a market capitalization of US$8.52b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, F5 boasts net cash, so it's fair to say it does not have a heavy debt load!
But the other side of the story is that F5 saw its EBIT decline by 5.9% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if F5 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While F5 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. Over the last three years, F5 actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Although F5's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$534.8m. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in US$409m. So is F5's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with F5 .
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.
What are the risks and opportunities for F5?
Trading at 55.7% below our estimate of its fair value
Earnings are forecast to grow 12.95% per year
Earnings grew by 22.6% over the past year
No risks detected for FFIV from our risks checks.
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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.