Howard Marks said 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 that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies EPAM Systems, Inc. (NYSE:EPAM) uses debt. But the more important question is: what risk does this debt create?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
See our latest analysis for EPAM Systems
What is EPAM Systems’ debt?
You can click on the graph below for historical numbers, but it shows that in March 2022, EPAM Systems had debt of $40.5 million, an increase of $25.0 million, year over year . However, his balance sheet shows he holds $1.28 billion in cash, so he actually has $1.24 billion in net cash.
What is the state of EPAM Systems’ balance sheet?
Looking at the latest balance sheet data, we can see that EPAM Systems had liabilities of $683.3 million due within 12 months and liabilities of $270.6 million due beyond. In compensation for these obligations, it had cash of US$1.28 billion as well as receivables valued at US$901.3 million due within 12 months. It can therefore boast of having $1.22 billion more in liquid assets than total Passives.
This short-term liquidity is a sign that EPAM Systems could probably repay its debt easily, as its balance sheet is far from stretched. In summary, EPAM Systems has a net cash position, so it is fair to say that it is not very leveraged!
On top of that, we are pleased to report that EPAM Systems increased its EBIT by 56%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But it is ultimately the company’s future profitability that will decide whether EPAM Systems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a company can only repay its debts with cold hard cash, not with book profits. EPAM Systems may have net cash on the balance sheet, but it’s always interesting to look at the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, EPAM Systems has recorded free cash flow of 79% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.
Summary
While it’s always a good idea to investigate a company’s debt, in this case EPAM Systems has $1.24 billion in net cash and a decent balance sheet. And it has impressed us with its 56% EBIT growth over the past year. We therefore do not believe that recourse to the debt of EPAM Systems is risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 2 warning signs for EPAM systems you should be aware.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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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.