EPAM Systems (NYSE:EPAM) Seems To Use Debt Rather Sparingly

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. We can see that EPAM Systems, Inc. (NYSE:EPAM) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for EPAM Systems

How Much Debt Does EPAM Systems Carry?

You can click the graphic below for the historical numbers, but it shows that EPAM Systems had US$25.8m of debt in March 2024, down from US$28.3m, one year before. However, its balance sheet shows it holds US$2.05b in cash, so it actually has US$2.02b net cash.

A Look At EPAM Systems' Liabilities

According to the last reported balance sheet, EPAM Systems had liabilities of US$658.5m due within 12 months, and liabilities of US$240.4m due beyond 12 months. On the other hand, it had cash of US$2.05b and US$931.4m worth of receivables due within a year. So it can boast US$2.08b 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. Given it has easily adequate short term liquidity, we don't think it will have any 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.

But the bad news is that EPAM Systems has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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'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 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$2.02b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$578m, being 81% of its EBIT. So is EPAM Systems's debt a risk? It doesn't seem so to us. We'd be very excited to see if EPAM Systems insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com