Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Varonis Systems, Inc. (NASDAQ:VRNS) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Varonis Systems’s Debt?
As you can see below, Varonis Systems had US$221.9m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$813.7m in cash, leading to a US$591.8m net cash position.
How Strong Is Varonis Systems’ Balance Sheet?
The latest balance sheet data shows that Varonis Systems had liabilities of US$181.6m due within a year, and liabilities of US$280.4m falling due after that. Offsetting these obligations, it had cash of US$813.7m as well as receivables valued at US$60.1m due within 12 months. So it can boast US$411.9m more liquid assets than total liabilities.
This surplus suggests that Varonis Systems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Varonis Systems has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Varonis Systems can strengthen its balance sheet over time.
Over 12 months, Varonis Systems reported revenue of US$335m, which is a gain of 29%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Varonis Systems?
Although Varonis Systems had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$8.3m. So although it is loss-making, it doesn’t seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 29% is a good sign. We’d see further strong growth as an optimistic indication. There’s no doubt that we learn most about debt from the balance sheet.