Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that EPAM Systems, Inc. (NYSE:EPAM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for EPAM Systems
How Much Debt Does EPAM Systems Carry?
The image below, which you can click on for greater detail, shows that EPAM Systems had debt of US$25.9m at the end of June 2023, a reduction from US$36.9m over a year. However, its balance sheet shows it holds US$1.85b in cash, so it actually has US$1.82b net cash.
A Look At EPAM Systems' Liabilities
Zooming in on the latest balance sheet data, we can see that EPAM Systems had liabilities of US$584.1m due within 12 months and liabilities of US$246.3m due beyond that. Offsetting these obligations, it had cash of US$1.85b as well as receivables valued at US$917.5m due within 12 months. So it can boast US$1.94b more liquid assets than total liabilities.
This short term liquidity is a sign that EPAM Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, EPAM Systems boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that EPAM Systems has increased its EBIT by 3.3% over twelve months, which should ease any concerns about debt repayment. 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 EPAM Systems 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. While EPAM Systems has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, EPAM Systems recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While it is always sensible to investigate a company's debt, in this case EPAM Systems has US$1.82b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$560m, being 76% of its EBIT. So is EPAM Systems's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in EPAM Systems, you may well want to click here to check an interactive graph of its earnings per share history.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.