These 4 Measures Indicate That Strategic Education (NASDAQ:STRA) Is Using Debt Reasonably Well

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.' 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. We can see that Strategic Education, Inc. (NASDAQ:STRA) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Strategic Education

How Much Debt Does Strategic Education Carry?

You can click the graphic below for the historical numbers, but it shows that Strategic Education had US$101.3m of debt in March 2023, down from US$141.7m, one year before. But on the other hand it also has US$227.3m in cash, leading to a US$126.0m net cash position.

How Healthy Is Strategic Education's Balance Sheet?

According to the last reported balance sheet, Strategic Education had liabilities of US$241.7m due within 12 months, and liabilities of US$313.6m due beyond 12 months. On the other hand, it had cash of US$227.3m and US$71.9m worth of receivables due within a year. So it has liabilities totalling US$256.2m more than its cash and near-term receivables, combined.

Since publicly traded Strategic Education shares are worth a total of US$1.67b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Strategic Education also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Strategic Education's load is not too heavy, because its EBIT was down 34% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Strategic 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Strategic 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. Happily for any shareholders, Strategic Education actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Strategic 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$126.0m. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in US$63m. So we don't have any problem with Strategic Education's use of debt. There's no doubt that we learn most about debt from the balance sheet. 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 Strategic Education you should know about.

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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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.