These 4 Measures Indicate That NetScout Systems (NASDAQ:NTCT) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for NetScout Systems

How Much Debt Does NetScout Systems Carry?

You can click the graphic below for the historical numbers, but it shows that NetScout Systems had US$200.0m of debt in June 2022, down from US$350.0m, one year before. However, it does have US$374.6m in cash offsetting this, leading to net cash of US$174.6m.

A Look At NetScout Systems' Liabilities

We can see from the most recent balance sheet that NetScout Systems had liabilities of US$415.2m falling due within a year, and liabilities of US$494.6m due beyond that. On the other hand, it had cash of US$374.6m and US$112.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$422.2m.

Of course, NetScout Systems has a market capitalization of US$2.23b, so these liabilities are probably manageable. 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, NetScout Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, NetScout Systems grew its EBIT by 21% 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 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 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. 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

Although NetScout Systems'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$174.6m. And it impressed us with free cash flow of US$249m, being 494% of its EBIT. So we don't think NetScout Systems's use of debt is risky. Another factor that would give us confidence in NetScout Systems would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.