Is Bright Scholar Education Holdings (NYSE:BEDU) Using Too Much Debt?

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.' 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. We can see that Bright Scholar Education Holdings Limited (NYSE:BEDU) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Bright Scholar Education Holdings

What Is Bright Scholar Education Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at August 2020 Bright Scholar Education Holdings had debt of CN¥3.03b, up from CN¥2.16b in one year. However, it does have CN¥3.39b in cash offsetting this, leading to net cash of CN¥357.8m.

How Strong Is Bright Scholar Education Holdings's Balance Sheet?

According to the last reported balance sheet, Bright Scholar Education Holdings had liabilities of CN¥3.70b due within 12 months, and liabilities of CN¥4.00b due beyond 12 months. Offsetting this, it had CN¥3.39b in cash and CN¥236.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥4.07b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥4.80b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Bright Scholar Education Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Bright Scholar Education Holdings grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. 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 Bright Scholar Education Holdings'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Bright Scholar Education Holdings 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, Bright Scholar Education Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Bright Scholar Education Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥357.8m. And it impressed us with free cash flow of CN¥341m, being 154% of its EBIT. So we are not troubled with Bright Scholar Education Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Bright Scholar Education Holdings (of which 1 shouldn't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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