ePlus (NASDAQ:PLUS) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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?

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

How Much Debt Does ePlus Carry?

The image below, which you can click on for greater detail, shows that ePlus had debt of US$128.3m at the end of March 2025, a reduction from US$141.3m over a year. But it also has US$389.4m in cash to offset that, meaning it has US$261.1m net cash.

How Healthy Is ePlus' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ePlus had liabilities of US$797.9m due within 12 months and liabilities of US$109.3m due beyond that. Offsetting these obligations, it had cash of US$389.4m as well as receivables valued at US$570.9m due within 12 months. So it actually has US$53.1m more liquid assets than total liabilities.

This short term liquidity is a sign that ePlus could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that ePlus has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for ePlus

But the bad news is that ePlus has seen its EBIT plunge 11% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 ePlus'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ePlus 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. Happily for any shareholders, ePlus actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ePlus has net cash of US$261.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$296m, being 108% of its EBIT. So we don't think ePlus's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in ePlus, you may well want to click here to check an interactive graph of its earnings per share history.

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.