Is CL Educate (NSE:CLEDUCATE) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CL Educate

How Much Debt Does CL Educate Carry?

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 ₹653.5m, one year before. However, it does have ₹779.2m in cash offsetting this, leading to net cash of ₹366.7m.

How Strong Is CL Educate's Balance Sheet?

According to the last reported balance sheet, CL Educate had liabilities of ₹1.06b due within 12 months, and liabilities of ₹121.8m due beyond 12 months. On the other hand, it had cash of ₹779.2m and ₹973.1m worth of receivables due within a year. So it can boast ₹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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that CL Educate has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CL Educate will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, CL Educate made a loss at the EBIT level, and saw its revenue drop to ₹1.9b, which is a fall of 42%. That makes us nervous, to say the least.

So How Risky Is CL Educate?

While CL Educate lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₹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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. To that end, you should learn about the 4 warning signs we've spotted with CL Educate (including 1 which is a bit unpleasant) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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