Is Strategic Education (NASDAQ:STRA) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Strategic Education, Inc. (NASDAQ:STRA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Strategic Education

What Is Strategic Education's Net Debt?

As you can see below, at the end of June 2021, Strategic Education had US$141.7m of debt, up from none a year ago. Click the image for more detail. But it also has US$265.6m in cash to offset that, meaning it has US$123.9m net cash.

A Look At Strategic Education's Liabilities

Zooming in on the latest balance sheet data, we can see that Strategic Education had liabilities of US$252.2m due within 12 months and liabilities of US$377.9m due beyond that. Offsetting this, it had US$265.6m in cash and US$78.6m in receivables that were due within 12 months. So its liabilities total US$285.9m more than the combination of its cash and short-term receivables.

Since publicly traded Strategic Education shares are worth a total of US$1.77b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Strategic Education boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Strategic Education if management cannot prevent a repeat of the 36% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Strategic 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, Strategic Education actually produced more free cash flow than EBIT. 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$123.9m. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in US$112m. 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. We've identified 3 warning signs with Strategic Education , and understanding them should be part of your investment process.

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.

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