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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, NetScout Systems, Inc. (NASDAQ:NTCT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is NetScout Systems's Debt?

You can click the graphic below for the historical numbers, but it shows that NetScout Systems had US$75.0m of debt in June 2024, down from US$100.0m, one year before. But it also has US$406.2m in cash to offset that, meaning it has US$331.2m net cash.

How Strong Is NetScout Systems' Balance Sheet?

According to the last reported balance sheet, NetScout Systems had liabilities of US$383.2m due within 12 months, and liabilities of US$270.2m due beyond 12 months. Offsetting these obligations, it had cash of US$406.2m as well as receivables valued at US$129.3m due within 12 months. So its liabilities total US$118.0m more than the combination of its cash and short-term receivables.

Given NetScout Systems has a market capitalization of US$1.55b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, NetScout Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that NetScout Systems's load is not too heavy, because its EBIT was down 47% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 NetScout 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While NetScout Systems 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. Over the last three years, NetScout Systems actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about NetScout Systems's liabilities, but we can be reassured by the fact it has has net cash of US$331.2m. The cherry on top was that in converted 278% of that EBIT to free cash flow, bringing in US$114m. So we don't have any problem with NetScout Systems's use of debt. Even though NetScout Systems lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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.