Is New Oriental Education & Technology Group (NYSE:EDU) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies New Oriental Education & Technology Group Inc. (NYSE:EDU) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for New Oriental Education & Technology Group

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

The chart below, which you can click on for greater detail, shows that New Oriental Education & Technology Group had US$14.4m in debt in May 2024; about the same as the year before. However, it does have US$4.78b in cash offsetting this, leading to net cash of US$4.76b.

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

The latest balance sheet data shows that New Oriental Education & Technology Group had liabilities of US$3.00b due within a year, and liabilities of US$481.8m falling due after that. Offsetting this, it had US$4.78b in cash and US$34.1m in receivables that were due within 12 months. So it can boast US$1.33b more liquid assets than total liabilities.

This surplus suggests that New Oriental Education & Technology Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, New Oriental Education & Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, New Oriental Education & Technology Group grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle its debt. 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 New Oriental Education & Technology Group'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. New Oriental Education & Technology Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, New Oriental Education & Technology Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that New Oriental Education & Technology Group has net cash of US$4.76b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$1.1b, being 361% of its EBIT. So we don't think New Oriental Education & Technology Group's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of New Oriental Education & Technology Group's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.