Does CLPS Incorporation (NASDAQ:CLPS) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies CLPS Incorporation (NASDAQ:CLPS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for CLPS Incorporation

What Is CLPS Incorporation's Net Debt?

As you can see below, at the end of December 2020, CLPS Incorporation had US$5.02m of debt, up from US$802.5k a year ago. Click the image for more detail. But it also has US$26.0m in cash to offset that, meaning it has US$21.0m net cash.

A Look At CLPS Incorporation's Liabilities

According to the last reported balance sheet, CLPS Incorporation had liabilities of US$27.8m due within 12 months, and liabilities of US$472.7k due beyond 12 months. Offsetting these obligations, it had cash of US$26.0m as well as receivables valued at US$31.2m due within 12 months. So it actually has US$28.9m more liquid assets than total liabilities.

This surplus liquidity suggests that CLPS Incorporation's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, CLPS Incorporation boasts net cash, so it's fair to say it does not have a heavy debt load!

Although CLPS Incorporation made a loss at the EBIT level, last year, it was also good to see that it generated US$3.9m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is CLPS Incorporation's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. CLPS Incorporation 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. Over the last year, CLPS Incorporation actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that CLPS Incorporation has net cash of US$21.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$5.7m, being 145% of its EBIT. So is CLPS Incorporation's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for CLPS Incorporation that you should be aware of.

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

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