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 note that CyberArk Software Ltd. (NASDAQ:CYBR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. 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.
How Much Debt Does CyberArk Software Carry?
The chart below, which you can click on for greater detail, shows that CyberArk Software had US$502.3m in debt in December 2020; about the same as the year before. However, it does have US$953.0m in cash offsetting this, leading to net cash of US$450.7m.
A Look At CyberArk Software’s Liabilities
Zooming in on the latest balance sheet data, we can see that CyberArk Software had liabilities of US$247.0m due within 12 months and liabilities of US$608.1m due beyond that. On the other hand, it had cash of US$953.0m and US$93.1m worth of receivables due within a year. So it actually has US$191.1m more liquid assets than total liabilities.
This surplus suggests that CyberArk Software has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CyberArk Software boasts net cash, so it’s fair to say it does not have a heavy debt load!
Shareholders should be aware that CyberArk Software’s EBIT was down 85% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CyberArk Software’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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While CyberArk Software 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. Happily for any shareholders, CyberArk Software actually produced more free cash flow than EBIT over the last three years. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
While it is always sensible to investigate a company’s debt, in this case CyberArk Software has US$450.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$100m, being 298% of its EBIT. So we don’t have any problem with CyberArk Software’s use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet.