We Think Strategic Education (NASDAQ:STRA) Can Stay On Top Of Its Debt
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Strategic Education, Inc. (NASDAQ:STRA) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Strategic Education
What Is Strategic Education's Net Debt?
As you can see below, Strategic Education had US$141.7m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$300.2m in cash to offset that, meaning it has US$158.5m net cash.
How Healthy Is Strategic Education's Balance Sheet?
The latest balance sheet data shows that Strategic Education had liabilities of US$254.8m due within a year, and liabilities of US$388.7m falling due after that. Offsetting this, it had US$300.2m in cash and US$64.8m in receivables that were due within 12 months. So its liabilities total US$278.6m more than the combination of its cash and short-term receivables.
Of course, Strategic Education has a market capitalization of US$1.54b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Strategic Education also has more cash than debt, so we're pretty confident it can manage its debt safely.
In fact Strategic Education's saving grace is its low debt levels, because its EBIT has tanked 20% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Strategic Education can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Strategic Education 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. Happily for any shareholders, Strategic Education actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
Although Strategic Education's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$158.5m. And it impressed us with free cash flow of US$112m, being 107% of its EBIT. So we don't have any problem with Strategic Education's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Strategic Education that you should be aware of.
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.
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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.
