Does NetScout Systems (NASDAQ:NTCT) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that NetScout Systems, Inc. (NASDAQ:NTCT) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for NetScout Systems

How Much Debt Does NetScout Systems Carry?

As you can see below, NetScout Systems had US$450.0m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$490.4m in cash offsetting this, leading to net cash of US$40.4m.

How Strong Is NetScout Systems' Balance Sheet?

We can see from the most recent balance sheet that NetScout Systems had liabilities of US$396.2m falling due within a year, and liabilities of US$771.9m due beyond that. On the other hand, it had cash of US$490.4m and US$208.0m worth of receivables due within a year. So it has liabilities totalling US$469.6m more than its cash and near-term receivables, combined.

This deficit isn't so bad because NetScout Systems is worth US$2.04b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, NetScout Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably NetScout Systems's EBIT was pretty flat over the last year. Ideally it can diminish its debt load by kick-starting earnings growth. 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 NetScout Systems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While NetScout Systems 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 two years, NetScout Systems actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While NetScout Systems does have more liabilities than liquid assets, it also has net cash of US$40.4m. The cherry on top was that in converted 541% of that EBIT to free cash flow, bringing in US$211m. So we don't have any problem with NetScout Systems's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of NetScout Systems's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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