ePlus (NASDAQ:PLUS) 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 ePlus inc. (NASDAQ:PLUS) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 ePlus

How Much Debt Does ePlus Carry?

You can click the graphic below for the historical numbers, but it shows that ePlus had US$154.4m of debt in September 2024, down from US$222.2m, one year before. But it also has US$187.5m in cash to offset that, meaning it has US$33.2m net cash.

A Look At ePlus' Liabilities

According to the last reported balance sheet, ePlus had liabilities of US$649.9m due within 12 months, and liabilities of US$103.1m due beyond 12 months. Offsetting these obligations, it had cash of US$187.5m as well as receivables valued at US$664.1m due within 12 months. So it actually has US$98.6m more liquid assets than total liabilities.

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

On the other hand, ePlus's EBIT dived 20%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ePlus 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ePlus 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, ePlus recorded free cash flow worth a fulsome 82% 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 we empathize with investors who find debt concerning, you should keep in mind that ePlus has net cash of US$33.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$307m, being 82% of its EBIT. So we are not troubled with ePlus's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of ePlus's earnings per share history for free.

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.