We Think Strategic Education (NASDAQ:STRA) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Strategic Education, Inc. (NASDAQ:STRA) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Strategic Education

How Much Debt Does Strategic Education Carry?

The image below, which you can click on for greater detail, shows that Strategic Education had debt of US$61.3m at the end of June 2024, a reduction from US$101.3m over a year. But on the other hand it also has US$256.2m in cash, leading to a US$194.9m net cash position.

A Look At Strategic Education's Liabilities

Zooming in on the latest balance sheet data, we can see that Strategic Education had liabilities of US$253.4m due within 12 months and liabilities of US$246.0m due beyond that. Offsetting these obligations, it had cash of US$256.2m as well as receivables valued at US$89.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$153.5m.

Of course, Strategic Education has a market capitalization of US$2.25b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Strategic Education boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Strategic Education grew its EBIT by 170% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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 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. 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. Over the last three years, Strategic Education recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Strategic Education's liabilities, but we can be reassured by the fact it has has net cash of US$194.9m. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in US$139m. So we don't think Strategic Education's use of debt is risky. 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. For example - Strategic Education has 1 warning sign we think you should be aware of.

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.