Strategic Education (NASDAQ:STRA) Has A Rock Solid Balance Sheet

Simply Wall St · 5d ago

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Strategic Education, Inc. (NASDAQ:STRA) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Strategic Education

What Is Strategic Education's Net Debt?

The image below, which you can click on for greater detail, shows that Strategic Education had debt of US$61.3m at the end of March 2024, a reduction from US$101.3m over a year. But on the other hand it also has US$253.6m in cash, leading to a US$192.3m net cash position.

debt-equity-history-analysis
NasdaqGS:STRA Debt to Equity History May 13th 2024

A Look At Strategic Education's Liabilities

The latest balance sheet data shows that Strategic Education had liabilities of US$261.7m due within a year, and liabilities of US$250.9m falling due after that. Offsetting these obligations, it had cash of US$253.6m as well as receivables valued at US$83.1m due within 12 months. So it has liabilities totalling US$176.0m more than its cash and near-term receivables, combined.

Since publicly traded Strategic Education shares are worth a total of US$2.94b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Strategic Education boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Strategic Education grew its EBIT by 129% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Strategic Education generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Strategic Education's liabilities, but we can be reassured by the fact it has has net cash of US$192.3m. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in US$122m. So we don't think Strategic Education's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Strategic Education that you should be aware of.

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.