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. Importantly, NetScout Systems, Inc. (NASDAQ:NTCT) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for NetScout Systems

What Is NetScout Systems's Net Debt?

You can click the graphic below for the historical numbers, but it shows that NetScout Systems had US$75.0m of debt in September 2024, down from US$100.0m, one year before. However, its balance sheet shows it holds US$400.9m in cash, so it actually has US$325.9m net cash.

A Look At NetScout Systems' Liabilities

Zooming in on the latest balance sheet data, we can see that NetScout Systems had liabilities of US$347.1m due within 12 months and liabilities of US$264.2m due beyond that. Offsetting these obligations, it had cash of US$400.9m as well as receivables valued at US$118.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$91.8m.

Given NetScout Systems has a market capitalization of US$1.52b, 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. While it does have liabilities worth noting, NetScout Systems also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that NetScout Systems's load is not too heavy, because its EBIT was down 54% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine NetScout Systems'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. NetScout Systems may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, NetScout Systems actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that NetScout Systems has US$325.9m in net cash. The cherry on top was that in converted 256% of that EBIT to free cash flow, bringing in US$136m. So we don't have any problem with NetScout Systems's use of debt. Even though NetScout Systems lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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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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.