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, Bright Scholar Education Holdings Limited (NYSE:BEDU) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Bright Scholar Education Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of May 2019 Bright Scholar Education Holdings had CN¥49.8m of debt, an increase on none, over one year. However, it does have CN¥2.33b in cash offsetting this, leading to net cash of CN¥2.28b.
How Healthy Is Bright Scholar Education Holdings's Balance Sheet?
According to the last reported balance sheet, Bright Scholar Education Holdings had liabilities of CN¥1.48b due within 12 months, and liabilities of CN¥82.2m due beyond 12 months. Offsetting this, it had CN¥2.33b in cash and CN¥94.2m in receivables that were due within 12 months. So it actually has CN¥854.2m more liquid assets than total liabilities.
This surplus suggests that Bright Scholar Education Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Bright Scholar Education Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Bright Scholar Education Holdings grew its EBIT by 19% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bright Scholar Education Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Bright Scholar Education Holdings 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. Happily for any shareholders, Bright Scholar Education Holdings 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.
While we empathize with investors who find debt concerning, you should keep in mind that Bright Scholar Education Holdings has net cash of CN¥2.3b, as well as more liquid assets than liabilities. The cherry on top was that in converted 143% of that EBIT to free cash flow, bringing in CN¥414m. So is Bright Scholar Education Holdings's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Bright Scholar Education Holdings's earnings per share history for free.
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.
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