NetScout Systems (NASDAQ:NTCT) Could Easily Take On More 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.' 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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 December 2024, down from US$100.0m, one year before. But it also has US$426.9m in cash to offset that, meaning it has US$351.9m net cash.

How Strong Is NetScout Systems' Balance Sheet?

The latest balance sheet data shows that NetScout Systems had liabilities of US$381.8m due within a year, and liabilities of US$272.4m falling due after that. On the other hand, it had cash of US$426.9m and US$214.6m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to NetScout Systems' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.61b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Also positive, NetScout Systems grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. 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 NetScout Systems 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, 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. Happily for any shareholders, NetScout Systems actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about NetScout Systems's liabilities, but we can be reassured by the fact it has has net cash of US$351.9m. The cherry on top was that in converted 220% of that EBIT to free cash flow, bringing in US$163m. So we don't think NetScout Systems's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - NetScout Systems has 1 warning sign we think you should be aware of.

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.