EPAM Systems (NYSE:EPAM) Seems To Use Debt Quite Sensibly

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. As with many other companies EPAM Systems, Inc. (NYSE:EPAM) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for EPAM Systems

What Is EPAM Systems's Debt?

The chart below, which you can click on for greater detail, shows that EPAM Systems had US$25.5m in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds US$1.85b in cash, so it actually has US$1.82b net cash.

How Strong Is EPAM Systems' Balance Sheet?

According to the last reported balance sheet, EPAM Systems had liabilities of US$602.5m due within 12 months, and liabilities of US$222.9m due beyond 12 months. On the other hand, it had cash of US$1.85b and US$960.9m worth of receivables due within a year. So it actually has US$1.98b more liquid assets than total liabilities.

This surplus suggests that EPAM Systems is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that EPAM Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for EPAM Systems if management cannot prevent a repeat of the 21% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if EPAM Systems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While EPAM Systems 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. Over the last three years, EPAM Systems recorded free cash flow worth a fulsome 81% 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 we empathize with investors who find debt concerning, you should keep in mind that EPAM Systems has net cash of US$1.82b, as well as more liquid assets than liabilities. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in US$548m. So we don't think EPAM Systems's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that EPAM Systems insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.