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.’ 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 should shareholders be worried about its use of debt?
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. 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, 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 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, Aspen Technology had US$95.9m of debt at December 2023, down from US$294.9m a year prior. But it also has US$130.8m in cash to offset that, meaning it has US$34.9m net cash.
A Look At Aspen Technology’s Liabilities
According to the last reported balance sheet, Aspen Technology had liabilities of US$372.0m due within 12 months, and liabilities of US$1.01b due beyond 12 months. Offsetting this, it had US$130.8m in cash and US$549.2m in receivables that were due within 12 months. So its liabilities total US$698.9m more than the combination of its cash and short-term receivables.
Given Aspen Technology has a humongous market capitalization of US$11.1b, it’s hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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. There’s no doubt that we learn most about debt from the balance sheet. 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’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Aspen Technology wasn’t profitable at an EBIT level, but managed to grow its revenue by 29%, to US$1.1b. With any luck the company will be able to grow its way to profitability.
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$274m. 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. One positive is that Aspen Technology is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it’s somewhat risky. 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.
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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Find out whether Aspen Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.