We Think ePlus (NASDAQ:PLUS) Can Stay On Top Of Its Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies ePlus inc. (NASDAQ:PLUS) 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for ePlus

How Much Debt Does ePlus Carry?

As you can see below, ePlus had US$140.9m of debt at December 2023, down from US$306.0m a year prior. But on the other hand it also has US$142.2m in cash, leading to a US$1.25m net cash position.

A Look At ePlus' Liabilities

The latest balance sheet data shows that ePlus had liabilities of US$631.5m due within a year, and liabilities of US$86.4m falling due after that. Offsetting this, it had US$142.2m in cash and US$647.4m in receivables that were due within 12 months. So it actually has US$71.7m 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.

The good news is that ePlus has increased its EBIT by 8.0% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. In the last three years, ePlus's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case ePlus has US$1.25m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 8.0% over the last year. So we are not troubled with ePlus's debt use. We'd be motivated to research the stock further if we found out that ePlus insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.