New Oriental Education & Technology Group (NYSE:EDU) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that New Oriental Education & Technology Group Inc. (NYSE:EDU) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for New Oriental Education & Technology Group

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

The image below, which you can click on for greater detail, shows that New Oriental Education & Technology Group had debt of US$15.1m at the end of November 2022, a reduction from US$179.4m over a year. However, it does have US$4.21b in cash offsetting this, leading to net cash of US$4.19b.

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

According to the last reported balance sheet, New Oriental Education & Technology Group had liabilities of US$1.92b due within 12 months, and liabilities of US$357.4m due beyond 12 months. Offsetting this, it had US$4.21b in cash and US$38.3m in receivables that were due within 12 months. So it can boast US$1.97b 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, New Oriental Education & Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, New Oriental Education & Technology Group turned things around in the last 12 months, delivering and EBIT of US$264m. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 year, New Oriental Education & Technology Group reported free cash flow worth 2.9% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

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$4.19b, as well as more liquid assets than liabilities. So we are not troubled with New Oriental Education & Technology Group's debt use. While New Oriental Education & Technology Group didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

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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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.