Is American Public Education (NASDAQ:APEI) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that American Public Education, Inc. (NASDAQ:APEI) 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?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for American Public Education

What Is American Public Education's Net Debt?

The image below, which you can click on for greater detail, shows that American Public Education had debt of US$94.3m at the end of September 2023, a reduction from US$155.8m over a year. But on the other hand it also has US$127.9m in cash, leading to a US$33.5m net cash position.

How Strong Is American Public Education's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that American Public Education had liabilities of US$82.3m due within 12 months and liabilities of US$191.6m due beyond that. Offsetting this, it had US$127.9m in cash and US$33.2m in receivables that were due within 12 months. So it has liabilities totalling US$112.8m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$184.4m, so it does suggest shareholders should keep an eye on American Public Education's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, American Public Education also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that American Public Education's EBIT was down 87% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 American Public 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While American Public 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. Over the last three years, American Public Education recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

Although American Public Education's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$33.5m. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in US$11m. So although we see some areas for improvement, we're not too worried about American Public Education's balance sheet. 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. Be aware that American Public Education is showing 2 warning signs in our investment analysis , you should know about...

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.