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Does CLPS Incorporation (NASDAQ:CLPS) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 CLPS Incorporation (NASDAQ:CLPS) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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, 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.

See our latest analysis for CLPS Incorporation

What Is CLPS Incorporation's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 CLPS Incorporation had debt of US$13.3m, up from US$5.02m in one year. But it also has US$28.3m in cash to offset that, meaning it has US$15.0m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is CLPS Incorporation's Balance Sheet?

According to the last reported balance sheet, CLPS Incorporation had liabilities of US$32.5m due within 12 months, and liabilities of US$2.25m due beyond 12 months. On the other hand, it had cash of US$28.3m and US$44.3m worth of receivables due within a year. So it can boast US$37.7m more liquid assets than total liabilities.

This surplus liquidity suggests that CLPS Incorporation's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, CLPS Incorporation boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, CLPS Incorporation grew its EBIT by 181% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CLPS Incorporation will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. CLPS Incorporation 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 two years, CLPS Incorporation reported free cash flow worth 6.5% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case CLPS Incorporation has US$15.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 181% over the last year. So is CLPS Incorporation's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for CLPS Incorporation you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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