Is New Oriental Education & Technology Group Inc’s (NYSE:EDU) Liquidity Good Enough?
Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as New Oriental Education & Technology Group Inc (NYSE:EDU), with a market capitalization of US$9.2b, rarely draw their attention from the investing community. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at EDU’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into EDU here.
Check out our latest analysis for New Oriental Education & Technology Group
Does EDU face the risk of succumbing to its debt-load?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. A ratio below 40% for mid-cap stocks is considered as financially healthy, as a rule of thumb. The good news for investors is that New Oriental Education & Technology Group has no debt. It has been operating its business with zero debt and utilising only its equity capital. Investors’ risk associated with debt is virtually non-existent with EDU, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can EDU meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, New Oriental Education & Technology Group has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at US$1.7b, it appears that the company has been able to meet these commitments with a current assets level of US$2.9b, leading to a 1.68x 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:
EDU has no debt in addition to ample cash to cover its short-term liabilities. Its safe operations reduces risk for the company and its investors, but some level of debt may also ramp up earnings growth and operational efficiency. Keep in mind I haven’t considered other factors such as how EDU has performed in the past. I suggest you continue to research New Oriental Education & Technology Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for EDU’s future growth? Take a look at our free research report of analyst consensus for EDU’s outlook.
Valuation: What is EDU 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 EDU 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.
