Health Check: How Prudently Does CL Educate (NSE:CLEDUCATE) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, CL Educate Limited (NSE:CLEDUCATE) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CL Educate

What Is CL Educate's Net Debt?

You can click the graphic below for the historical numbers, but it shows that CL Educate had ₹412.6m of debt in September 2020, down from ₹557.1m, one year before. But it also has ₹779.2m in cash to offset that, meaning it has ₹366.7m net cash.

How Healthy Is CL Educate's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CL Educate had liabilities of ₹1.06b due within 12 months and liabilities of ₹121.8m due beyond that. On the other hand, it had cash of ₹779.2m and ₹973.1m worth of receivables due within a year. So it actually has ₹568.1m more liquid assets than total liabilities.

This surplus liquidity suggests that CL Educate's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, CL Educate boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

Over 12 months, CL Educate made a loss at the EBIT level, and saw its revenue drop to ₹2.1b, which is a fall of 37%. To be frank that doesn't bode well.

So How Risky Is CL Educate?

Although CL Educate had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₹185m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with CL Educate (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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