Does Grand Canyon Education (NASDAQ:LOPE) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Grand Canyon Education, Inc. (NASDAQ:LOPE) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Grand Canyon Education

What Is Grand Canyon Education's Net Debt?

The image below, which you can click on for greater detail, shows that Grand Canyon Education had debt of US$99.5m at the end of March 2021, a reduction from US$132.6m over a year. But it also has US$262.3m in cash to offset that, meaning it has US$162.8m net cash.

How Healthy Is Grand Canyon Education's Balance Sheet?

According to the last reported balance sheet, Grand Canyon Education had liabilities of US$152.8m due within 12 months, and liabilities of US$143.5m due beyond 12 months. Offsetting this, it had US$262.3m in cash and US$97.6m in receivables that were due within 12 months. So it can boast US$63.5m more liquid assets than total liabilities.

This state of affairs indicates that Grand Canyon Education's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$4.15b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Grand Canyon Education has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Grand Canyon Education grew its EBIT by 2.7% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Grand Canyon Education can strengthen its balance sheet over time. 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 Grand Canyon 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, Grand Canyon Education recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Grand Canyon Education has US$162.8m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 2.7% over the last year. So we are not troubled with Grand Canyon Education's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Grand Canyon Education you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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