Is Laureate Education (NASDAQ:LAUR) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Laureate Education, Inc. (NASDAQ:LAUR) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Laureate Education

How Much Debt Does Laureate Education Carry?

As you can see below, at the end of September 2024, Laureate Education had US$101.9m of debt, up from US$74.5m a year ago. Click the image for more detail. But on the other hand it also has US$134.4m in cash, leading to a US$32.5m net cash position.

How Healthy Is Laureate Education's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Laureate Education had liabilities of US$411.9m due within 12 months and liabilities of US$618.5m due beyond that. On the other hand, it had cash of US$134.4m and US$94.4m worth of receivables due within a year. So its liabilities total US$801.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Laureate Education has a market capitalization of US$3.03b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Laureate Education boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Laureate Education grew its EBIT by 17% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Laureate Education's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Laureate 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. Looking at the most recent three years, Laureate Education recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Laureate 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$32.5m. And it impressed us with its EBIT growth of 17% over the last year. So we are not troubled with Laureate Education's debt use. 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 - Laureate Education has 1 warning sign 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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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.