Does EPAM Systems (NYSE:EPAM) Have A Healthy Balance Sheet?

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. Importantly, EPAM Systems, Inc. (NYSE:EPAM) does carry debt. But should shareholders be worried about its use of debt?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for EPAM Systems

What Is EPAM Systems's Debt?

The image below, which you can click on for greater detail, shows that EPAM Systems had debt of US$28.3m at the end of March 2023, a reduction from US$40.5m over a year. However, its balance sheet shows it holds US$1.81b in cash, so it actually has US$1.78b 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$682.9m due within 12 months and liabilities of US$258.0m due beyond that. Offsetting this, it had US$1.81b in cash and US$934.2m in receivables that were due within 12 months. So it can boast US$1.80b 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!

EPAM Systems's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine EPAM Systems's ability to maintain a healthy balance sheet going forward. 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. EPAM Systems 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 three years, EPAM Systems recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case EPAM Systems has US$1.78b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in US$537m. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.