Does CL Educate (NSE:CLEDUCATE) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that CL Educate Limited (NSE:CLEDUCATE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CL Educate

What Is CL Educate's Debt?

As you can see below, CL Educate had ₹169.7m of debt at March 2022, down from ₹428.3m a year prior. But on the other hand it also has ₹609.0m in cash, leading to a ₹439.3m net cash position.

How Healthy Is CL Educate's Balance Sheet?

The latest balance sheet data shows that CL Educate had liabilities of ₹727.6m due within a year, and liabilities of ₹133.9m falling due after that. On the other hand, it had cash of ₹609.0m and ₹629.6m worth of receivables due within a year. So it actually has ₹377.1m more liquid assets than total liabilities.

This short term liquidity is a sign that CL Educate could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that CL Educate has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that CL Educate improved its EBIT from a last year's loss to a positive ₹124m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CL Educate's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. CL Educate 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. Over the last year, CL Educate recorded free cash flow worth a fulsome 100% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CL Educate has net cash of ₹439.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 100% of that EBIT to free cash flow, bringing in ₹124m. So we don't think CL Educate'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 example - CL Educate has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.