Laureate Education (NASDAQ:LAUR) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Laureate Education, Inc. (NASDAQ:LAUR) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Laureate Education

What Is Laureate Education's Debt?

You can click the graphic below for the historical numbers, but it shows that Laureate Education had US$115.2m of debt in September 2021, down from US$1.36b, one year before. But on the other hand it also has US$1.86b in cash, leading to a US$1.74b net cash position.

How Healthy Is Laureate Education's Balance Sheet?

The latest balance sheet data shows that Laureate Education had liabilities of US$1.92b due within a year, and liabilities of US$769.2m falling due after that. Offsetting these obligations, it had cash of US$1.86b as well as receivables valued at US$173.5m due within 12 months. So it has liabilities totalling US$654.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Laureate Education has a market capitalization of US$2.36b, 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. 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.

It is well worth noting that Laureate Education's EBIT shot up like bamboo after rain, gaining 35% in the last twelve months. That'll make it easier to manage its 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Laureate Education produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While Laureate Education does have more liabilities than liquid assets, it also has net cash of US$1.74b. And we liked the look of last year's 35% year-on-year EBIT growth. So we don't have any problem with Laureate Education's use of debt. 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. We've identified 2 warning signs with Laureate Education , and understanding them should be part of your investment process.

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.