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

Warren Buffett famously said, '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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for EPAM Systems

What Is EPAM Systems's Net Debt?

You can click the graphic below for the historical numbers, but it shows that EPAM Systems had US$26.1m of debt in December 2023, down from US$30.6m, one year before. But it also has US$2.10b in cash to offset that, meaning it has US$2.07b net cash.

How Healthy Is EPAM Systems' Balance Sheet?

We can see from the most recent balance sheet that EPAM Systems had liabilities of US$644.9m falling due within a year, and liabilities of US$236.0m due beyond that. On the other hand, it had cash of US$2.10b and US$897.0m worth of receivables due within a year. So it can boast US$2.11b more liquid assets than total liabilities.

This surplus suggests that EPAM Systems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that EPAM Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, EPAM Systems's EBIT dived 18%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, EPAM Systems produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that EPAM Systems has net cash of US$2.07b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$534m, being 75% of its EBIT. So we are not troubled with EPAM Systems's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that EPAM Systems is showing 1 warning sign in our investment analysis , you should know about...

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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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.