Is Laureate Education (NASDAQ:LAUR) Using Too Much Debt?

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 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. Importantly, Laureate Education, Inc. (NASDAQ:LAUR) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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, 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.

View our latest analysis for Laureate Education

What Is Laureate Education's Debt?

The image below, which you can click on for greater detail, shows that Laureate Education had debt of US$106.6m at the end of March 2022, a reduction from US$900.6m over a year. But it also has US$293.8m in cash to offset that, meaning it has US$187.3m net cash.

How Strong Is Laureate Education's Balance Sheet?

The latest balance sheet data shows that Laureate Education had liabilities of US$426.5m due within a year, and liabilities of US$737.6m falling due after that. On the other hand, it had cash of US$293.8m and US$156.1m worth of receivables due within a year. So its liabilities total US$714.2m more than the combination of its cash and short-term receivables.

Laureate Education has a market capitalization of US$2.24b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Laureate Education also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Laureate Education grew its EBIT at 13% over the last year, further increasing its ability to manage debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Laureate 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. Looking at the most recent three years, Laureate Education recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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$187.3m. On top of that, it increased its EBIT by 13% in the last twelve months. So we are not troubled with Laureate Education's debt use. Even though Laureate Education lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.