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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that CLPS Incorporation (NASDAQ:CLPS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for CLPS Incorporation

What Is CLPS Incorporation's Net Debt?

As you can see below, CLPS Incorporation had US$10.6m of debt at June 2023, down from US$14.5m a year prior. But it also has US$22.2m in cash to offset that, meaning it has US$11.7m net cash.

How Healthy Is CLPS Incorporation's Balance Sheet?

The latest balance sheet data shows that CLPS Incorporation had liabilities of US$26.3m due within a year, and liabilities of US$3.50m falling due after that. Offsetting these obligations, it had cash of US$22.2m as well as receivables valued at US$48.9m due within 12 months. So it can boast US$41.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that CLPS Incorporation's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, CLPS Incorporation boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact CLPS Incorporation's saving grace is its low debt levels, because its EBIT has tanked 67% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CLPS Incorporation's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While CLPS Incorporation 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. During the last three years, CLPS Incorporation burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that CLPS Incorporation has net cash of US$11.7m and plenty of liquid assets. So we are not troubled with CLPS Incorporation's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - CLPS Incorporation has 4 warning signs we think you should be aware of.

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.