How Financially Strong Is Laureate Education Inc (NASDAQ:LAUR)?
Stocks with market capitalization between $2B and $10B, such as Laureate Education Inc (NASDAQ:LAUR) with a size of $2.54B, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. I will take you through a few basic checks to assess the financial health of companies with no debt. See our latest analysis for Laureate Education
Is LAUR’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. LAUR’s debt-to-equity ratio exceeds 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. We can test if LAUR’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings (EBIT) should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. In LAUR’s case, its interest is not sufficiently covered by its profits as the ratio is 1.01x. Debtors may be less inclined to loan the company more money, giving LAUR less headroom for growth through debt.
Can LAUR meet its short-term obligations with the cash in hand?
A different measure of financial health is measured by its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. In order to measure liquidity, we must compare LAUR’s current assets with its upcoming liabilities. Our analysis shows that LAUR is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? With a high level of debt on its balance sheet, LAUR could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case so investors should ask themselves if they believe LAUR can sustainably increase its operational efficiency going forward. Given that LAUR’s financial position may differ over time, I encourage exploring market expectations for LAUR’s future growth on our free analysis platform.
Are you a potential investor? While investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. LAUR’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
