New Oriental Education & Technology Group (NYSE:EDU) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that New Oriental Education & Technology Group Inc. (NYSE:EDU) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does New Oriental Education & Technology Group Carry?

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 November 2024; about the same as the year before. However, it does have US$4.71b in cash offsetting this, leading to net cash of US$4.70b.

How Healthy 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$3.13b falling due within a year, and liabilities of US$518.8m due beyond that. Offsetting these obligations, it had cash of US$4.71b as well as receivables valued at US$41.1m due within 12 months. So it actually has US$1.10b 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!

View our latest analysis for New Oriental Education & Technology Group

Also positive, New Oriental Education & Technology Group grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if New Oriental Education & Technology Group can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. 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 three years, New Oriental Education & Technology Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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$4.70b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$699m, being 174% of its EBIT. So is New Oriental Education & Technology Group's debt a risk? It doesn't seem so to us. 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.