Navneet Education (NSE:NAVNETEDUL) Has A Pretty 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 Navneet Education Limited (NSE:NAVNETEDUL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Navneet Education

What Is Navneet Education's Net Debt?

The image below, which you can click on for greater detail, shows that Navneet Education had debt of ₹386.2m at the end of September 2020, a reduction from ₹443.0m over a year. However, its balance sheet shows it holds ₹689.7m in cash, so it actually has ₹303.5m net cash.

How Healthy Is Navneet Education's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Navneet Education had liabilities of ₹1.89b due within 12 months and liabilities of ₹299.6m due beyond that. Offsetting these obligations, it had cash of ₹689.7m as well as receivables valued at ₹2.28b due within 12 months. So it actually has ₹782.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Navneet Education could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Navneet Education boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Navneet Education if management cannot prevent a repeat of the 73% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Navneet Education can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Navneet Education 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. During the last three years, Navneet Education produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Navneet Education has net cash of ₹303.5m, as well as more liquid assets than liabilities. So we don't have any problem with Navneet Education's use of debt. 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. Take risks, for example - Navneet Education has 2 warning signs we think you should be aware of.

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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