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. We note that Aspen Technology, Inc. (NASDAQ:AZPN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. 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. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Aspen Technology
How Much Debt Does Aspen Technology Carry?
As you can see below, at the end of June 2024, Aspen Technology had US$47.3m of debt, up from US$21.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$237.0m in cash, so it actually has US$189.7m net cash.
A Look At Aspen Technology’s Liabilities
The latest balance sheet data shows that Aspen Technology had liabilities of US$337.4m due within a year, and liabilities of US$921.5m falling due after that. Offsetting these obligations, it had cash of US$237.0m as well as receivables valued at US$603.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$418.7m.
Of course, Aspen Technology has a titanic market capitalization of US$15.0b, so these liabilities are probably manageable. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Aspen Technology also has more cash than debt, so we’re pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aspen Technology’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Aspen Technology wasn’t profitable at an EBIT level, but managed to grow its revenue by 8.0%, to US$1.1b. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Aspen Technology?
Although Aspen Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$323m. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. With revenue growth uninspiring, we’d really need to see some positive EBIT before mustering much enthusiasm for this business. For riskier companies like Aspen Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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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.