F5 Networks (NASDAQ: FFIV) Seems to Use Debt Quite Wisely

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, F5 Networks, Inc. (NASDAQ: FFIV) bears the debt. But should shareholders be concerned about its use of debt?

When Is Debt a Problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

Check out our latest analysis for F5 networks

What is F5 Networks net debt?

You can click on the graph below for historical numbers, but it shows that as of September 2020, F5 Networks had $ 388.3 million in debt, an increase from none, year over year. However, his balance sheet shows that he holds $ 1.21 billion in cash, so he actually has $ 821.6 million in net cash.


How strong is F5 Networks’ balance sheet?

The latest balance sheet data shows that F5 Networks had liabilities of US $ 1.29 billion due within one year, and liabilities of US $ 1.16 billion due thereafter. On the other hand, he had $ 1.21 billion in cash and $ 434.3 million in receivables due within one year. Its liabilities therefore total $ 801.5 million more than the combination of its cash and short-term receivables.

Considering that publicly traded F5 Networks shares are worth a very impressive US $ 10.7 billion total, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. While it has some liabilities to note, F5 Networks also has more cash than debt, so we’re pretty confident it can handle its debt safely.

Modest indebtedness may become critical for F5 Networks if management cannot prevent a repeat of the 21% reduction in EBIT over the past year. Falling profits (if the trend continues) could eventually make even small debt risky enough. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether F5 Networks can strengthen its balance sheet over time. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. F5 Networks may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. to manage debt. Over the past three years, F5 Networks has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.

In summary

While it is always a good idea to look at a company’s total liabilities, it is very reassuring that F5 Networks has US $ 821.6 million in net cash. And he impressed us with free cash flow of US $ 601 million, or 126% of his EBIT. So we have no problem with the use of debt by F5 Networks. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for F5 networks that you need to be aware of.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, then feel free to find out. our exclusive list of cash net growth stocks, today.

This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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