Warren Buffett famously said, '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, Extreme Networks, Inc. (NASDAQ:EXTR) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
How Much Debt Does Extreme Networks Carry?
You can click the graphic below for the historical numbers, but it shows that Extreme Networks had US$187.6m of debt in June 2024, down from US$221.9m, one year before. On the flip side, it has US$156.7m in cash leading to net debt of about US$30.9m.
A Look At Extreme Networks' Liabilities
The latest balance sheet data shows that Extreme Networks had liabilities of US$517.6m due within a year, and liabilities of US$499.7m falling due after that. Offsetting this, it had US$156.7m in cash and US$89.5m in receivables that were due within 12 months. So it has liabilities totalling US$771.1m more than its cash and near-term receivables, combined.
Extreme Networks has a market capitalization of US$1.98b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Extreme Networks's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Extreme Networks made a loss at the EBIT level, and saw its revenue drop to US$1.1b, which is a fall of 15%. That's not what we would hope to see.
Caveat Emptor
While Extreme Networks's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$29m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$86m into a profit. So to be blunt we do think it is risky. For riskier companies like Extreme Networks I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
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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.
