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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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that ePlus inc. (NASDAQ:PLUS) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for ePlus
How Much Debt Does ePlus Carry?
The image below, which you can click on for greater detail, shows that at June 2019 ePlus had debt of US$209.0m, up from US$184.2m in one year. On the flip side, it has US$35.6m in cash leading to net debt of about US$173.4m.
How Strong Is ePlus's Balance Sheet?
We can see from the most recent balance sheet that ePlus had liabilities of US$407.4m falling due within a year, and liabilities of US$38.8m due beyond that. On the other hand, it had cash of US$35.6m and US$408.1m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to ePlus's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.08b company is struggling for cash, we still think it's worth monitoring its balance sheet.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.