New Oriental Education & Technology Group (NYSE:EDU) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 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?

When Is Debt Dangerous?

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. 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?

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 August 2024; about the same as the year before. But it also has US$4.81b in cash to offset that, meaning it has US$4.79b net cash.

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$2.97b due within a year, and liabilities of US$504.6m falling due after that. Offsetting this, it had US$4.81b in cash and US$39.1m in receivables that were due within 12 months. So it can boast US$1.38b 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. 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.

In addition to that, we're happy to report that New Oriental Education & Technology Group has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. 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, 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 two years. 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$4.79b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$606m, being 210% 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.