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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies CyberArk Software Ltd. (NASDAQ:CYBR) makes use of 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does CyberArk Software Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2019 CyberArk Software had US$485.1m of debt, an increase on none, over one year. But on the other hand it also has US$1.06b in cash, leading to a US$579.7m net cash position.
How Strong Is CyberArk Software's Balance Sheet?
The latest balance sheet data shows that CyberArk Software had liabilities of US$192.7m due within a year, and liabilities of US$588.4m falling due after that. Offsetting these obligations, it had cash of US$1.06b as well as receivables valued at US$73.0m due within 12 months. So it can boast US$356.8m 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. Simply put, the fact that CyberArk Software has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, CyberArk Software grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. 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 CyberArk Software 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. CyberArk Software 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, 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 we empathize with investors who find debt concerning, you should keep in mind that CyberArk Software has net cash of US$579.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 252% of that EBIT to free cash flow, bringing in US$135m. So we don't think CyberArk Software's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - CyberArk Software has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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