New Oriental Education & Technology Group (NYSE:EDU) Could Easily Take On More 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 New Oriental Education & Technology Group

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

You can click the graphic below for the historical numbers, but it shows that New Oriental Education & Technology Group had US$14.7m of debt in May 2023, down from US$65.4m, one year before. But on the other hand it also has US$4.00b in cash, leading to a US$3.98b net cash position.

A Look At New Oriental Education & Technology Group's Liabilities

The latest balance sheet data shows that New Oriental Education & Technology Group had liabilities of US$2.25b due within a year, and liabilities of US$326.7m falling due after that. Offsetting these obligations, it had cash of US$4.00b as well as receivables valued at US$42.5m due within 12 months. So it actually has US$1.46b more liquid assets than total liabilities.

It's good to see that New Oriental Education & Technology Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that New Oriental Education & Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Although New Oriental Education & Technology Group made a loss at the EBIT level, last year, it was also good to see that it generated US$190m in EBIT over the last twelve months. 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. While New Oriental Education & Technology Group 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, New Oriental Education & Technology Group actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case New Oriental Education & Technology Group has US$3.98b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$971m, being 511% of its EBIT. So is New Oriental Education & Technology Group's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in New Oriental Education & Technology Group, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.