Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Strategic Education, Inc. (NASDAQ:STRA) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Strategic Education
What Is Strategic Education’s Debt?
As you can see below, Strategic Education had US$141.7m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$300.2m in cash to offset that, meaning it has US$158.5m net cash.
A Look At Strategic Education’s Liabilities
Zooming in on the latest balance sheet data, we can see that Strategic Education had liabilities of US$254.8m due within 12 months and liabilities of US$388.7m due beyond that. Offsetting this, it had US$300.2m in cash and US$64.8m in receivables that were due within 12 months. So its liabilities total US$278.6m more than the combination of its cash and short-term receivables.
Given Strategic Education has a market capitalization of US$1.65b, it’s hard to believe these liabilities pose much threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Strategic Education boasts net cash, so it’s fair to say it does not have a heavy debt load!
It is just as well that Strategic Education’s load is not too heavy, because its EBIT was down 20% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Strategic Education 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, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. Strategic Education 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. Happily for any shareholders, Strategic Education actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While Strategic Education does have more liabilities than liquid assets, it also has net cash of US$158.5m. And it impressed us with free cash flow of US$112m, being 107% of its EBIT. So we are not troubled with Strategic Education’s debt use. 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. For example, we’ve discovered 3 warning signs for Strategic Education that you should be aware of before investing here.
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.
