These 4 Measures Indicate That American Public Education (NASDAQ:APEI) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies American Public Education, Inc. (NASDAQ:APEI) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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, 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.

View our latest analysis for American Public Education

What Is American Public Education's Debt?

As you can see below, American Public Education had US$93.1m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$135.4m in cash, leading to a US$42.3m net cash position.

How Healthy Is American Public Education's Balance Sheet?

The latest balance sheet data shows that American Public Education had liabilities of US$89.4m due within a year, and liabilities of US$189.8m falling due after that. On the other hand, it had cash of US$135.4m and US$48.0m worth of receivables due within a year. So it has liabilities totalling US$95.7m more than its cash and near-term receivables, combined.

American Public Education has a market capitalization of US$394.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 388% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Happily for any shareholders, American Public Education actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While American Public Education does have more liabilities than liquid assets, it also has net cash of US$42.3m. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in US$22m. So we don't think American Public Education's use of debt is risky. 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 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.