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

Simply Wall St · 10/15 10:08

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Laureate Education, Inc. (NASDAQ:LAUR) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for Laureate Education

What Is Laureate Education's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Laureate Education had US$176.1m of debt, an increase on US$150.6m, over one year. On the flip side, it has US$128.8m in cash leading to net debt of about US$47.2m.

debt-equity-history-analysis
NasdaqGS:LAUR Debt to Equity History October 15th 2024

How Strong Is Laureate Education's Balance Sheet?

The latest balance sheet data shows that Laureate Education had liabilities of US$381.7m due within a year, and liabilities of US$762.9m falling due after that. On the other hand, it had cash of US$128.8m and US$125.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$890.4m.

While this might seem like a lot, it is not so bad since Laureate Education has a market capitalization of US$2.34b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Laureate Education has a low net debt to EBITDA ratio of only 0.11. And its EBIT easily covers its interest expense, being 35.5 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. And we also note warmly that Laureate Education grew its EBIT by 14% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Laureate Education's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Laureate Education reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

Laureate Education's interest cover was a real positive on this analysis, as was its net debt to EBITDA. On the other hand, its conversion of EBIT to free cash flow makes us a little less comfortable about its debt. Considering this range of data points, we think Laureate Education is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. For instance, we've identified 1 warning sign for Laureate Education that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.