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Lincoln Educational Services (NASDAQ:LINC) Seems To Use Debt Quite Sensibly

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Simply Wall St
·4 min read
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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 can see that Lincoln Educational Services Corporation (NASDAQ:LINC) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Lincoln Educational Services

What Is Lincoln Educational Services's Debt?

The image below, which you can click on for greater detail, shows that Lincoln Educational Services had debt of US$18.7m at the end of September 2020, a reduction from US$26.9m over a year. But it also has US$26.5m in cash to offset that, meaning it has US$7.85m net cash.


How Strong Is Lincoln Educational Services's Balance Sheet?

According to the last reported balance sheet, Lincoln Educational Services had liabilities of US$71.3m due within 12 months, and liabilities of US$77.3m due beyond 12 months. Offsetting these obligations, it had cash of US$26.5m as well as receivables valued at US$33.6m due within 12 months. So its liabilities total US$88.5m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Lincoln Educational Services is worth US$161.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Lincoln Educational Services boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Lincoln Educational Services's EBIT launched higher than Elon Musk, gaining a whopping 1,186% on last year. 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 Lincoln Educational Services can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Lincoln Educational Services 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. Over the most recent two years, Lincoln Educational Services recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While Lincoln Educational Services does have more liabilities than liquid assets, it also has net cash of US$7.85m. And it impressed us with its EBIT growth of 1,186% over the last year. So we don't have any problem with Lincoln Educational Services's use of debt. 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. Consider risks, for instance. Every company has them, and we've spotted 4 warning signs for Lincoln Educational Services you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

This article by Simply Wall St is general in nature. 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.

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