Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies ePlus inc. (NASDAQ:PLUS) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is ePlus's Net Debt?

As you can see below, ePlus had US$140.9m of debt at December 2023, down from US$306.0m a year prior. But it also has US$142.2m in cash to offset that, meaning it has US$1.25m net cash.

How Strong Is ePlus' Balance Sheet?

The latest balance sheet data shows that ePlus had liabilities of US$631.5m due within a year, and liabilities of US$86.4m falling due after that. On the other hand, it had cash of US$142.2m and US$647.4m worth of receivables due within a year. So it actually has US$71.7m more liquid assets than total liabilities.

This surplus suggests that ePlus has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ePlus has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that ePlus has increased its EBIT by 8.0% over twelve months, which should ease any concerns about debt repayment. 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 ePlus can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ePlus 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. In the last three years, ePlus's free cash flow amounted to 39% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ePlus has net cash of US$1.25m, as well as more liquid assets than liabilities. And it also grew its EBIT by 8.0% over the last year. So we are not troubled with ePlus's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that ePlus insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.