Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, F5 Networks, Inc. (NASDAQ:FFIV) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for F5 Networks

What Is F5 Networks's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 F5 Networks had US$388.3m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$1.21b in cash, so it actually has US$821.6m net cash.

How Strong Is F5 Networks's Balance Sheet?

The latest balance sheet data shows that F5 Networks had liabilities of US$1.29b due within a year, and liabilities of US$1.16b falling due after that. On the other hand, it had cash of US$1.21b and US$434.3m worth of receivables due within a year. So its liabilities total US$801.5m more than the combination of its cash and short-term receivables.

Since publicly traded F5 Networks shares are worth a very impressive total of US$10.7b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, F5 Networks also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for F5 Networks if management cannot prevent a repeat of the 21% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if F5 Networks 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. F5 Networks 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. Over the last three years, F5 Networks actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that F5 Networks has US$821.6m in net cash. And it impressed us with free cash flow of US$601m, being 126% of its EBIT. So we don't have any problem with F5 Networks's use of debt. 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 F5 Networks 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.

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. 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.

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