What Investors Should Know About Career Education Corporation’s (NASDAQ:CECO) Financial Strength
The direct benefit for Career Education Corporation (NASDAQ:CECO), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is CECO will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean CECO has outstanding financial strength. I recommend you look at the following hurdles to assess CECO’s financial health.
Check out our latest analysis for Career Education
Does CECO’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on CECO’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if CECO is a high-growth company. CECO delivered a negative revenue growth of -8.4%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does CECO’s liquid assets cover its short-term commitments?
Since Career Education doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of US$105.9m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$230.7m, leading to a 2.18x current account ratio. Usually, for Consumer Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Next Steps:
As a high-growth company, it may be beneficial for CECO to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, CECO’s financial situation may change. I admit this is a fairly basic analysis for CECO’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Career Education to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for CECO’s future growth? Take a look at our free research report of analyst consensus for CECO’s outlook.
Valuation: What is CECO worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CECO is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
