Is American Public Education (NASDAQ:APEI) Using Too Much Debt?

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.' 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. We can see that American Public Education, Inc. (NASDAQ:APEI) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for American Public Education

What Is American Public Education's Debt?

The chart below, which you can click on for greater detail, shows that American Public Education had US$92.8m in debt in June 2024; about the same as the year before. However, it does have US$129.8m in cash offsetting this, leading to net cash of US$37.0m.

How Healthy Is American Public Education's Balance Sheet?

The latest balance sheet data shows that American Public Education had liabilities of US$78.9m due within a year, and liabilities of US$193.1m falling due after that. Offsetting these obligations, it had cash of US$129.8m as well as receivables valued at US$42.9m due within 12 months. So it has liabilities totalling US$99.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since American Public Education has a market capitalization of US$281.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, American Public Education boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, American Public Education grew its EBIT by 11,703% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 company can only pay off debt with cold hard cash, not accounting profits. American Public Education may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, American Public Education recorded free cash flow worth a fulsome 95% 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

While American Public Education does have more liabilities than liquid assets, it also has net cash of US$37.0m. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in US$31m. So is American Public Education's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - American Public Education has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.