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.' 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. Importantly, Varonis Systems, Inc. (NASDAQ:VRNS) does carry debt. But is this debt a concern to shareholders?

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. 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.

How Much Debt Does Varonis Systems Carry?

As you can see below, Varonis Systems had US$251.2m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$627.3m in cash to offset that, meaning it has US$376.1m net cash.

How Healthy Is Varonis Systems' Balance Sheet?

According to the last reported balance sheet, Varonis Systems had liabilities of US$334.5m due within 12 months, and liabilities of US$301.8m due beyond 12 months. Offsetting this, it had US$627.3m in cash and US$122.4m in receivables that were due within 12 months. So it actually has US$113.5m more liquid assets than total liabilities.

This state of affairs indicates that Varonis Systems' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$6.27b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Varonis Systems reported revenue of US$521m, which is a gain of 6.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Varonis Systems?

While Varonis Systems lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$82m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Varonis Systems that 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.