Here's Why CL Educate (NSE:CLEDUCATE) Can Manage Its Debt Responsibly

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.' 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 CL Educate Limited (NSE:CLEDUCATE) makes use of debt. But is this debt a concern to shareholders?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

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 as of September 2024 CL Educate had ₹248.1m of debt, an increase on ₹169.1m, over one year. But it also has ₹975.9m in cash to offset that, meaning it has ₹727.8m net cash.

How Healthy Is CL Educate's Balance Sheet?

We can see from the most recent balance sheet that CL Educate had liabilities of ₹1.17b falling due within a year, and liabilities of ₹169.2m due beyond that. Offsetting this, it had ₹975.9m in cash and ₹868.1m in receivables that were due within 12 months. So it can boast ₹501.2m more liquid assets than total liabilities.

This surplus suggests that CL Educate has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CL Educate boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, CL Educate saw its EBIT drop by 2.0% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since CL Educate will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CL Educate 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, CL Educate saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CL Educate has net cash of ₹727.8m, as well as more liquid assets than liabilities. So we don't have any problem with CL Educate's use of debt. 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 3 warning signs we think you should be aware of.

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.

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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.