These 4 Measures Indicate That EPAM Systems (NYSE:EPAM) Is Using Debt Safely

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. As with many other companies EPAM Systems, Inc. (NYSE:EPAM) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider 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$25.3m at the end of September 2024, a reduction from US$27.5m over a year. But on the other hand it also has US$2.06b in cash, leading to a US$2.03b net cash position.

How Healthy Is EPAM Systems' Balance Sheet?

We can see from the most recent balance sheet that EPAM Systems had liabilities of US$681.0m falling due within a year, and liabilities of US$221.5m due beyond that. Offsetting this, it had US$2.06b in cash and US$956.0m in receivables that were due within 12 months. So it can boast US$2.11b more liquid assets than total liabilities.

This excess liquidity suggests that EPAM Systems is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, EPAM Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, EPAM Systems saw its EBIT drop by 8.8% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 83% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case EPAM Systems has US$2.03b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in US$574m. So we don't think EPAM Systems's use of debt is risky. Another factor that would give us confidence in EPAM Systems would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.