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We Think Laureate Education (NASDAQ:LAUR) Can Stay On Top Of Its Debt

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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Laureate Education, Inc. (NASDAQ:LAUR) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Laureate Education

What Is Laureate Education's Net Debt?

As you can see below, Laureate Education had US$125.6m of debt at June 2021, down from US$1.51b a year prior. However, it does have US$427.1m in cash offsetting this, leading to net cash of US$301.6m.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Laureate Education's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Laureate Education had liabilities of US$616.8m due within 12 months and liabilities of US$754.6m due beyond that. On the other hand, it had cash of US$427.1m and US$140.7m worth of receivables due within a year. So its liabilities total US$803.6m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Laureate Education is worth US$3.00b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Laureate Education boasts net cash, so it's fair to say it does not have a heavy debt load!

It is well worth noting that Laureate Education's EBIT shot up like bamboo after rain, gaining 44% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Laureate Education 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. While Laureate Education has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Laureate Education actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Laureate Education does have more liabilities than liquid assets, it also has net cash of US$301.6m. The cherry on top was that in converted 111% of that EBIT to free cash flow, bringing in US$170m. So we don't think Laureate Education's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Laureate Education insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.