Stock Analysis

Is Lincoln Educational Services (NASDAQ:LINC) A Risky Investment?

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NasdaqGS:LINC
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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.' 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 note that Lincoln Educational Services Corporation (NASDAQ:LINC) does have debt on its balance sheet. 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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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How Much Debt Does Lincoln Educational Services Carry?

As you can see below, Lincoln Educational Services had US$17.4m of debt at March 2021, down from US$19.5m a year prior. But on the other hand it also has US$26.7m in cash, leading to a US$9.32m net cash position.

debt-equity-history-analysis
NasdaqGS:LINC Debt to Equity History May 24th 2021

How Healthy Is Lincoln Educational Services' Balance Sheet?

The latest balance sheet data shows that Lincoln Educational Services had liabilities of US$60.6m due within a year, and liabilities of US$72.5m falling due after that. Offsetting these obligations, it had cash of US$26.7m as well as receivables valued at US$30.6m due within 12 months. So its liabilities total US$75.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Lincoln Educational Services has a market capitalization of US$206.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Lincoln Educational Services also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Lincoln Educational Services grew its EBIT by 99% over the last twelve months, and that growth will make it easier to handle 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 Lincoln Educational Services'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Lincoln Educational Services 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 most recent two years, Lincoln Educational Services recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While Lincoln Educational Services does have more liabilities than liquid assets, it also has net cash of US$9.32m. And it impressed us with its EBIT growth of 99% over the last year. So is Lincoln Educational Services'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. Case in point: We've spotted 2 warning signs for Lincoln Educational Services you should be aware of, and 1 of them is significant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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What are the risks and opportunities for Lincoln Educational Services?

Lincoln Educational Services Corporation, together with its subsidiaries, provides various career-oriented post-secondary education services to high school graduates and working adults in the United States.

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Rewards

  • Price-To-Earnings ratio (9.2x) is below the US market (15.1x)

Risks

  • High level of non-cash earnings

  • Shareholders have been diluted in the past year

  • Profit margins (6.1%) are lower than last year (13.1%)

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