We think F5 (NASDAQ:FFIV) can manage its debt with ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies F5, Inc. (NASDAQ:FFIV) uses debt. But the more important question is: what risk does this debt create?

What risk does debt carry?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.

See our latest analysis for F5

What is F5’s debt?

You can click on the chart below for historical numbers, but it shows F5 had $359.4 million in debt in March 2022, up from $378.7 million a year prior. However, he has $887.1 million in cash to offset this, which translates to net cash of $527.7 million.

NasdaqGS: FFIV Debt to Equity History June 20, 2022

A Look at F5’s Responsibilities

The latest balance sheet data shows that F5 had liabilities of $1.77 billion due within one year, and liabilities of $906.8 million due thereafter. In return, it had $887.1 million in cash and $665.4 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables of US$1.13 billion.

Given that publicly traded F5 shares are worth a total of US$9.11 billion, it seems unlikely that this level of liability is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time. Despite its notable liabilities, F5 has a net cash position, so it’s fair to say that it doesn’t have a lot of debt!

The good news is that F5 increased its EBIT by 6.7% year-on-year, which should ease any worries about debt repayment. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine F5’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cash, not book profits. F5 may have net cash on the balance sheet, but it’s always interesting to look at how well the company converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its need and its ability. to manage debt. Luckily for all shareholders, F5 has actually produced more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summary

Although F5 has more liabilities than liquid assets, it also has a net cash position of $527.7 million. The icing on the cake was converting 133% of that EBIT into free cash flow, bringing in $564 million. So is F5 debt a risk? This does not seem to us to be the case. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example – F5 a 2 warning signs we think you should know.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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