Is New Oriental Education & Technology Group (NYSE:EDU) A Risky Investment?

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.' 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 New Oriental Education & Technology Group Inc. (NYSE:EDU) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for New Oriental Education & Technology Group

What Is New Oriental Education & Technology Group's Debt?

You can click the graphic below for the historical numbers, but it shows that New Oriental Education & Technology Group had US$113.2m of debt in February 2022, down from US$297.5m, one year before. But on the other hand it also has US$4.41b in cash, leading to a US$4.30b net cash position.

How Strong Is New Oriental Education & Technology Group's Balance Sheet?

We can see from the most recent balance sheet that New Oriental Education & Technology Group had liabilities of US$1.89b falling due within a year, and liabilities of US$674.7m due beyond that. Offsetting these obligations, it had cash of US$4.41b as well as receivables valued at US$43.9m due within 12 months. So it actually has US$1.89b more liquid assets than total liabilities.

This surplus strongly suggests that New Oriental Education & Technology Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, New Oriental Education & Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine New Oriental Education & Technology Group'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.

Over 12 months, New Oriental Education & Technology Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is New Oriental Education & Technology Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year New Oriental Education & Technology Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$1.4b of cash and made a loss of US$1.0b. With only US$4.30b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 1 warning sign for New Oriental Education & Technology Group you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.