Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Aspen Technology, Inc. (NASDAQ:AZPN) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Aspen Technology Carry?
The image below, which you can click on for greater detail, shows that Aspen Technology had debt of US$95.9m at the end of December 2023, a reduction from US$294.9m over a year. But on the other hand it also has US$130.8m in cash, leading to a US$34.9m net cash position.
How Strong Is Aspen Technology's Balance Sheet?
The latest balance sheet data shows that Aspen Technology had liabilities of US$372.0m due within a year, and liabilities of US$1.01b falling due after that. Offsetting these obligations, it had cash of US$130.8m as well as receivables valued at US$549.2m due within 12 months. So its liabilities total US$698.9m more than the combination of its cash and short-term receivables.
Of course, Aspen Technology has a titanic market capitalization of US$13.4b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Aspen Technology boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Aspen Technology 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.
Over 12 months, Aspen Technology reported revenue of US$1.1b, which is a gain of 29%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Aspen Technology?
Although Aspen Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$274m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Aspen Technology shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. For riskier companies like Aspen Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.